Reasons Why The Tesla-SolarCity Deal Looks Fugly

Piper Jaffray initiates coverage on Tesla Motors (NASDAQ:TSLA) The brokerage firm has issued a Neutral rating on the shares. In past two days, the stock has lost more than 10% of its value.

The stock decreased 1.65% or $3.25 during the last trading session, hitting $193.15. Tesla shares have declined, as well, and the company is struggling to keep up with demand for its new “affordable” Model 3 electric vehicle priced at $35,000, which it will begin to deliver in 2017.

Elon Musk’s electric vehicle company, Tesla, has announced a $2.8 billion bid for another Musk company, SolarCity. We need this a lot more than we need to buy solar panels from a auto company.

The Tesla stock price is at a lower price than it was past year at this time, with the stock price having slipped 26.63%. SolarCity is now the largest residential solar panel provider in the USA, whereas Tesla produces powercell home batteries and electric cars. 13 analysts are offering 12 month price targets with the lowest price target being $90 and the highest $500 – the share is now trading at around $197.

Musk said SolarCity and Tesla are in sync. The first one is the quality and appeal of its vehicles.

“SolarCity, whose bonds were yielding 20 percent yesterday, is a company headed toward financial distress”, Chanos said in an emailed statement on Wednesday.

Nonetheless, he expressed confidence that Tesla will end up owning SolarCity.

Tesla has worked towards complete sustainability since its inception, offering increasingly affordable electric vehicles.

Tesla’s plan to boost its production aggressively also raised questions about the company’s ability to manage extra funds to achieve higher production.

However, Jonas views such benefits as theoretical and still far off. Secondly, the pace with which the company consumes cash reserves exhibits its liquidity freedom.

The sell-off in Tesla’s stock after the takeover bid was announced cost Musk about $925 million on paper, exceeding the $325 million gain in the value of his SolarCity holdings. This happens because Utilities procure expensive electricity. However, two other Chinese cities, Suzhou and Hefei, are now courting the upstart electric vehicle maker to be the location of its assembly plant in Asia, according to the report. The company has had negative free cash flow for several quarters and burned nearly $2 billion during 2015. While Musk says the deal is a “no-brainer”, the news caused Tesla shares to tumble.

The proposed combination is problematic, Barclays analyst Brian Johnson said in a research note. “I don’t think most solar customers would buy a Tesla yet”.

As per the analyst, in the near time, Tesla shares might face pressure during the transaction, but in the long run, the automaker is likely to offer substantial upside potential for long-term investors.

Right now, Tesla stock has a market cap of $28.7 billion, while SolarCity’s market cap is at $2.1 billion. Should products be offered within the same vicinity, there is reason to believe both companies will profit accordingly.