Predicting whether TSLA-SCTY merger will go through

[neroden]

There wasn't a topic specifically for this.

Someone who *isn't* one of the usual suspects at Seeking Alpha (ValueAnalyst) has made an interesting analysis of the voters:
http://seekingalpha.com/article/3983611-tesla-solarcity-3-interesting-facts
http://seekingalpha.com/article/3984592-tesla-sale

He notes 45% of TSLA stockholders own SCTY and concludes that the deal will pass. His math is wrong, so I'm redoing it.

Musk has 21.1% of the stock:
(Citation: Tesla’s SolarCity deal gets support from shareholders and hate from people who don’t own the stock )

Gracias has 0.18%, Straubel has 0.17%, Kimball Musk has 0.10%.
(Citation: Who Are the Top 4 Tesla (TSLA) Shareholders? )

So 21.55% of shares are not being voted, leaving 78.45% to be voted. This means 39.255% is needed to win.

The 45% of TSLA stockholders who own SCTY includes Musk (21.1%) and Fidelity (11.1%), meaning it's only 12.8% of the "other" stockholders. (This includes Bank of Montreal at 3.1%. I'm assuming it doesn't include Bailie Gifford, since they own only a token amount of SCTY -- if it does, my calculations are way off.)

Fidelity + the "other" stockholders who own SCTY is then 23.9%. If Bailie Gifford (8.1%) and T Rowe Price (5%) support the deal, that's only 37%. This is not quite a majority, contrary to the statement of ValueAnalyst, but it is pretty close. I think winning the support of 2.25% more of the TSLA stockholders (4.1% of those who do not hold SCTY) is not going to be that hard.

Even if Bailie Gifford and T Rowe Price vote no, it would still only require support of 15.35% more of TSLA stock -- which is to say, 28% of those shareholders who own TSLA and do not own SCTY. It does seem very likely to go through, though a strong statement of opposition from Bailie Gifford could change stockholders' opinion.

I still hope that Musk will provide a realistic plan for refinancing SCTY's debt and getting out of the financing business, which would *really* make the deal a no-brainer.

Based on this article, I believe James Anderson at Bailie Gifford is probably going to make Musk present a refinancing plan, since he warned of the threat of a capital market freeze for Tesla: Tesla's SolarCity bid worries Baillie Gifford's Anderson

 

[Rarity]

Edit: Apologies. I don't think that I'm reading my screen correctly.

 

[tander]

So we're approaching a point where solar panels and batteries save people money, much like the way solar panels and net metering did. What is the problem with carrying forward a similar financing model as they move towards energy storage? Same basic principle they help save money on the power bill, finances the hardware and takes a cut of the savings over the longer term.

Regarding the merger, just looking at the big picture, it seems highly unlikely it won't go through considering that the companies are already basically controlled and founded by the same person.

 

[neroden]

So we're approaching a point where solar panels and batteries save people money, much like the way solar panels and net metering did. What is the problem with carrying forward a similar financing model as they move towards energy storage?

The "similar financing model" already wasn't working for solar. Consensus in the solar industry is that residential and commercial customers are moving to bank loans for direct ownership. PPAs on rooftops lower the value of the house. PPAs are becoming primarily a utility-scale thing now. Why repeat a financing model which already wasn't working?

 

[Johan]

Since SCTY is trading at a relatively low valuation one could argue that many (most?) of those who hold both TSLA and SCTY have bought in to SCTY at a higher price than today's? If so, from a purely short sighted perspective, perhaps those holders would oppose the deal? However, I would suppose many of them (myself for example) could see how in the long run the money I've invested in SCTY will do better work for me converted to TSLA shares, with TSLA being the new Tesla+Solarcity entity, regardless of short term "losses".

 

[tander]

The "similar financing model" already wasn't working for solar. Consensus in the solar industry is that residential and commercial customers are moving to bank loans for direct ownership. PPAs on rooftops lower the value of the house. PPAs are becoming primarily a utility-scale thing now. Why repeat a financing model which already wasn't working?

I might be misreading something, I dot think I'm totally fluent in utility speak, but what I meant was is there that big of a difference between leasing solar systems for net metering and loaning for purchase of solar/battery systems? The financing model worked great for a while, they got a ton of panels on roofs, it just doesn't now that net metering is on the way out. Now they are just loaning people the money to purchase systems instead of leasing them right? Either way they are going to creating value/saving people money (hopefully)/ and growing solar and the business. It makes sense that people would would want to own their systems at this point, but if SCTY is selling them their systems and/or financing them, where is the problem in the long term? The only problem I see is it sort of complicates things from an investment standpoint, but that doesn't necessarily make it bad?

 

[SBenson]

Musk will get his way (when does he ever not?). Deal will get done.

 

[dakh]

One important bit of this analysis that I don't understand: does it assume every single outstanding share that is eligible to vote, votes? I think the smaller the investor the less probability they'll bother. So I think biggest hands will determine the outcome.

 

[neroden]

*cough* I think I misunderstood you.

I might be misreading something, I dot think I'm totally fluent in utility speak, but what I meant was is there that big of a difference between leasing solar systems for net metering and loaning for purchase of solar/battery systems? The financing model worked great for a while, they got a ton of panels on roofs, it just doesn't now that net metering is on the way out. Now they are just loaning people the money to purchase systems instead of leasing them right?

That's been the trend.

Either way they are going to creating value/saving people money (hopefully)/ and growing solar and the business.

Yeah.

It makes sense that people would would want to own their systems at this point, but if SCTY is selling them their systems and/or financing them, where is the problem in the long term? The only problem I see is it sort of complicates things from an investment standpoint, but that doesn't necessarily make it bad?

I still think we're speaking past each other. What I'm thinking is this:

If SCTY switches to a simple bank-loan model, it *vastly* simplifies things from an investment standpoint. You can then evaluate SCTY purely as a solar installation and sales company.

From a financing point of view, there are a lot of extra bank-like risks if SCTY is the one fronting the capital and lending the money.

However, if SCTY has a fairly straightforward loan operation, it's at least fairly straightfoward to *evaluate* that financing operation. (The loan is separated into capital payment, which is the same as the amount SCTY would get for a direct sale, and interest payments. To evaluate the financing side of the business, you look at the interest rates and durations on the loans, and compare to the interest rates and durations SCTY has to pay to borrow money from the bond market. Or if SCTY resells the loan, you can use any number of loan valuation models to figure out whether the resale was at a profit.)

Simple leases are harder to evaluate, but still fairly straightfoward -- again they can be separated into a capital and an interest component for evaluation.

With a PPA, which conceals the effective interest rate paid by the homeowners, it's extremely hard to evaluate those risks. It's probably worth setting PPAs up for big utility-scale deals where an individual project can be explained in enough detail to evaluate, and crucially, where the long-term financing is typically secured *in advance*.

But with thousands of residential homeowners' PPAs being aggregated, and not individually reported... it's like mortgage-backed securities. It gets very hard, perhaps impossible, to evaluate. SCTY is suffering an "informational discount" to its stock because of this. And these aren't financed in advance -- what I did *not* see in the SCTY annual report was "We have advance commitments from our partners to buy ABS backed by the next XXXX sales we make". (If I missed it, perhaps Foghat will point it out.)

To his credit, Musk says he does not want TSLA to suffer an informational discount to its stock, which would imply that he's going to get rid of this opaque financing operation.

Anyway, when I say "business model" I am including the financing schemes as part of the business model. I think the residential PPA business model is doomed (others disagree), and I see a bright future for the bank-loan / direct-purchase business model.

 

[neroden]

One important bit of this analysis that I don't understand: does it assume every single outstanding share that is eligible to vote, votes? I think the smaller the investor the less probability they'll bother. So I think biggest hands will determine the outcome.

You might be right. But I think the institutional investors pretty much always vote. There are a lot of institutional investors with fairly small holdings.

 

[dakh]

You might be right. But I think the institutional investors pretty much always vote. There are a lot of institutional investors with fairly small holdings.

Again I only am speculating but for example if institutional investor is holding SCTY as part of alternative energy index, in effect it's their retail customers that have SCTY in their retirement accounts. So I again question how likely that is to produce a vote.

 

[EV-lutioin]

Since shares in Solar City have dropped 70% in the last two years, Tesla shareholders may view the acquisition as a bargain for Tesla. Much better that they buy it now than two years ago. As for SC shareholders, the deal may not look as good, but I am guessing that they will surmise that shares in Tesla will have more opportunity to rise in value than shares in SC and will vote for the sale.

 

[Cosmacelf]

My broker called a fund manager that was invested in TSLA the day after the deal was announced - he had already dumped his entire position. I suspect the large holders who do not like this deal have already bailed. Only people looking to stay for long haul will remain, and thus the vote will go through.

There is a screaming arbitrage deal if you think this analysis is correct. You can either buy SCTY shares (which are at a discount to what Tesla will buy them for), or buy either of the two large unsecured 2 and 3 year SCTY bonds which are trading around $.70. Tesla is obligated to refinance these bonds (at par, of course), so that's an immediate 42% gain right there.

 

[Cosmacelf]

I made a mistake in my post above. The convertible bonds that SCTY has outstanding do not get redeemed if Tesla buys SCTY, they just turn into TSLA convertible bonds. It's still a great deal if you think the acquisition will occur...

 

[Drivin]

I made a mistake in my post above. The convertible bonds that SCTY has outstanding do not get redeemed if Tesla buys SCTY, they just turn into TSLA convertible bonds. It's still a great deal if you think the acquisition will occur...

It is an even better deal when you realize that Elon says this will be a $1,000,000,000,000 company.
That is a 40x+ return or so right there - and if it takes more than 12 months to get there, you can cash out at a more favorable capital gain rate.

 

[SteveG3]

Even if Bailie Gifford and T Rowe Price vote no, it would still only require support of 15.35% more of TSLA stock -- which is to say, 28% of those shareholders who own TSLA and do not own SCTY. It does seem very likely to go through, though a strong statement of opposition from Bailie Gifford could change stockholders' opinion.

I still hope that Musk will provide a realistic plan for refinancing SCTY's debt and getting out of the financing business, which would *really* make the deal a no-brainer.

Based on this article, I believe James Anderson at Bailie Gifford is probably going to make Musk present a refinancing plan, since he warned of the threat of a capital market freeze for Tesla: Tesla's SolarCity bid worries Baillie Gifford's Anderson

It's a bit late here for me, and these numbers do get a bit confusing, but I think Tesla would need substantially more than 28% of the TSLA shareholders that don't own SCTY to vote yes if Bailie Gifford and T Rowe vote no... tipping off my reservations on this deal at this point, spinning this around, in that scenario we don't need 72% of the remaining shareholders to vote no to stop the deal, in theory a more plausible 63% could do it, though the real number is likely a bit higher given that not everyone will vote.

here's what I'm looking at, in all cases for simplicity assuming everyone who can vote will,

SCTY/TSLA owners that will vote (i.e. not Musk, Gracias, JB, or Kimball) will be 30.4% of the vote, 23.9/78.5.

so assuming SCTY/TSLA owners vote yes in TSLA vote, that means 30.4% in the "yes" column with 69.6% of the total voting shares still up for grabs.

if B Gifford and T Rowe vote no, that's 13.1/78.5, or 16.7% in the "no" column with 52.9% of total voting shares still up for grabs.

So, for the yes vote to hit 50%, they'd need 19.6/52.9, or 37% of the remaining vote.

this is why in a scenario where the eligible SCTY/TSLA owners vote "yes", B Gifford & T Rowe vote "no", and everyone votes, breaking 63% of the rest of us voting "no" would stop the deal (definitely check my numbers, it is late here). while the real percent needed to vote no is very likely materially higher than 63% (due to some of the smaller holders not voting), it's not such a high threshold that I think anyone including Elon sees it as a sure thing. Elon may have had conversations that tell him other big institutional owners are in the bag, but if not, I think Elon/Tesla are looking at either making a more convincing case for this deal, revising the deal, or finding some other non-TSLA solution for SCTY.

 

[Seesaw]

It's a bit late here for me, and these numbers do get a bit confusing, but I think Tesla would need substantially more than 28% of the TSLA shareholders that don't own SCTY to vote yes if Bailie Gifford and T Rowe vote no... tipping off my reservations on this deal at this point, spinning this around, in that scenario we don't need 72% of the remaining shareholders to vote no to stop the deal, in theory a more plausible 63% could do it, though the real number is likely a bit higher given that not everyone will vote.

here's what I'm looking at, in all cases for simplicity assuming everyone who can vote will,

SCTY/TSLA owners that will vote (i.e. not Musk, Gracias, JB, or Kimball) will be 30.4% of the vote, 23.9/78.5.

so assuming SCTY/TSLA owners vote yes in TSLA vote, that means 30.4% in the "yes" column with 69.6% of the total voting shares still up for grabs.

if B Gifford and T Rowe vote no, that's 13.1/78.5, or 16.7% in the "no" column with 52.9% of total voting shares still up for grabs.

So, for the yes vote to hit 50%, they'd need 19.6/52.9, or 37% of the remaining vote.

this is why in a scenario where the eligible SCTY/TSLA owners vote "yes", B Gifford & T Rowe vote "no", and everyone votes, breaking 63% of the rest of us voting "no" would stop the deal (definitely check my numbers, it is late here). while the real percent needed to vote no is very likely materially higher than 63% (due to some of the smaller holders not voting), it's not such a high threshold that I think anyone including Elon sees it as a sure thing. Elon may have had conversations that tell him other big institutional owners are in the bag, but if not, I think Elon/Tesla are looking at either making a more convincing case for this deal, revising the deal, or finding some other non-TSLA solution for SCTY.

I wonder what Elon could do to make the deal more attractive to voters.

I think complete transparency on SolaCity's financial situation and the value that could be extracted from the company by incorporating it into tesla. Also would like to see any plans they would have for the company.

 

[neroden]

At this point, I'm thinking it has high odds of going through. Especially if Musk convinces Bailie Gifford to support the deal (presumably by presenting a financing plan).

 

[SBenson]

Anyway, when I say "business model" I am including the financing schemes as part of the business model. I think the residential PPA business model is doomed (others disagree), and I see a bright future for the bank-loan / direct-purchase business model.

This is what I and a few others have been advocating since a long time. SCTY deluded itself into believing that it is making vastly greater profits by doing these PPAs. Thanks to a lot of faulty assumptions. Gradually reality set in and they eventually figured out a simple direct-bank-loan-to-homeowner is just as profitable but it completely eliminates the liquidity risk. Alas, it's too late and a rescue is needed. I'm pretty darn sure that Tesla will not continue with this horrific of a mess, what ever it takes.

 

[jhm]

The next big question is what exchange rate will the deal settle on? They've put out a range of 0.122 to 0.131 TSLA shares per SCTY. Do we expect the deal to settle in that range? How will it be determined?

Currently, SCTY is trading at a 9% to 15% discount to TSLA given settlement in range. So I'm tempted to load up on some SCTY shares as a cheap way to buy TSLA. Of course the flipside of this is that the market does not think the deal will go through, at least not within the stated exchange rates.

Is SolarCity easier to short right now than Tesla? That could also create a gap between the two prices.