Elon Musk’s decision to attempt an acquisition of SolarCity in an all-stock deal wasn’t because of impending financial doom at SolarCity, though that may have contributed. Incorporating solar was part of Elon Musks original master plan written 10 years ago. This is a logical time to buy solarCity based on Tesla’s progression and a current focus on becoming the world’s best manufacturer.
The timing is bad from a financial standpoint, no doubt, but each time Tesla sells new shares buyers show up despite overwhelmingly negative news and sentiment. There aren’t many Elon Musks and there aren’t many ways to gain exposure to potentially viable renewable energy companies. The backdrop is institutional divestiture of oil assets due, in large part, to societies collective understanding of climate change. Elon Musk is a bankable way to reinvest that money.
Tesla is offering .11 shares of TSLA per share of SCTY. Today (9/8/2016) Tesla closed at $197.36. SCTY closed today at $17.44, 24.5% below $21.71, the amount SCTY shareholders would theoretically be receiving in Tesla stock if the deal closed today. That 24% represents doubt that the deal goes through, and potentially also represents the future value of Tesla’s stock, when the deal is complete. Both stocks have 20%+ short interest.
Here’s my forecast of probabilities:
Tesla acquires SolarCity and sees strong demand in secondary: 30%
Tesla acquires SolarCity and sees lackluster demand in secondary: 34%
Tesla acquires SolarCity and sees horrid demand and stock crashes: 6%
Tesla doesn’t acquire SolarCity, sees strong demand & SolarCity survives: 16%
Tesla doesn’t acquire SolarCity, sees strong demand & SolarCity=SunEdison: 4%
Tesla doesn’t acquire SolarCity, sees weak demand & SolarCity survives: 8%
Tesla doesn’t acquire SolarCity, sees weak demand& SolarCity=SunEdison: 2%
I’ve spent the last week slowly buying SCTY and today I bought a half as much TSLA in case the deal doesn’t happen. I’ve assigned a 80% probability the deal does happen, in which case I have a free 24% buffer holding SCTY stock. (Tesla can drop 24% and SCTY is at par.)
I’ll continue to proportionally increase the size of these positions into volatility. I see the current sentiment in SolarCity as an opportunity to buy one of the most disruptive companies of the modern era at a reasonable valuation. I do not think the market is completely recognizing the implications of the Gigafactory on the size of Tesla’s top line when the bottom line turns positive.
TSLA & SCTY account for 15% of my portfolio.