Elon Musk led Tesla Motors (NASDAQ: TSLA) has offered to buy Solar City (NASDAQ: SCTY), the largest roof top solar equipment installer in the US in an all cash deal worth $2.8 billion. Tesla Motors said that it had offered between $26.50-$28.50 for each Solar City share, which is almost a 25 % to 35% markup on the beleaguered solar equipment company's Tuesday closing price of $21.19.
The markets reacted immediately, pulling down Tesla Motors share value down by 13%, to $189.99, a market cap loss of close to $4.3 billion. On the other hand, the share price of Solar City climbed by 18%, to $25.02. The CEO of Solar City is Elon Musk's first cousin, Lyndon Rive. Elon Musk is the chairman of the Solar City and also its largest shareholder, owning 22% of the company.
The fall in share price of Tesla Motors confirms that Tesla shareholders are not convinced about the buy. They reason that if Tesla buys Solar City, it would divert the company's focus away from building cars. There are also fears that the deal will financially strain Tesla Motors, considering that Solar City is reeling under a $6.4 billion debt.
Solar City is the market leader in roof top solar installation in the US but the company is not profitable. Solar City share prices have plummeted by close to 60% since the beginning of this year. Most of this is blamed on the company's business model (no down-payment), which is considered too complex for a highly competitive industry, essentially making the company a cash guzzler.
Elon Musk has justified the buy offer going as far as to call it a 'no brainer'. He says if Tesla buys the company, they can offer an electric car, a solar energy system and a home battery all under one roof. He told reporters that instead of making three trips to the customer's house to install the car charger, the battery pack and the solar panels, they can complete the job in one trip.
In an earlier blog entry he had said that he did not know how many Tesla customers owned solar energy systems but he had a good guess that they would be interested in one. So it is a good way to expand both the companies' market. Meanwhile, Tesla is on the verge of beginning deliveries of its latest electric car, the Model 3 next year. The Model 3 car will retail for close to $35,000.