Shareholders approve Tesla Solarcity acquisition | Hacker News Reader

Shareholders approve Tesla Solarcity acquisition

techcrunch.com

253 pointsastdb33 comments

SolarCity shareholders approved the deal early today. The government also approved the deal, by not blocking the deal, so this is going to happen.

Here is Bloomberg's stub article on the deal.

https://www.bloomberg.com/news/articles/2016-11-17/tesla-sha...

They tend to write tweet length articles for breaking news like this so google can index them and then flesh out the article as details become available.

The after hours trading is heavy as this comes the day before monthly option expiry, so there is alot of factors at work here.

- The merger arb group is trying to arb out the last bit of profit as the deal is now confirmed.

- The option traders are now looking at their new exposure due to the Tesla jump

- The shorts are getting hammered, again, and now have to decide if they really want to hold a short position in a stock with little external catalysts to move it downward before the end of the year.

> little external catalysts to move it downward before the end of the year.

I agree with the "before the end of the year" qualifier. In the longer term, one interesting external catalyst recently came up: Norway's largest political party Ap, who are likely to win the election next year, have said they will reduce the tax breaks on EVs costing more than ~$50k, essentially letting the tax breaks only apply to the part of the price below $50k. This would increase the price of a Model S by >$20k in Norway.

(Norway has been one of Tesla's biggest markets outside the US; in 2015 10% of all Teslas sold went to Norway.)

Hi, I was wondering if any peeps who have read any of TSLA or SCTY research reports by any Street analysts (not that those people can be trusted) or have done due diligence as a investor care to share about,

(1) Projection of what exactly is TSLA's market share for the next five years with the introduction of Chevy Bolt on the lower-end; and potential new competitors like GOOGL and self-driving/electric cars of traditional auto makers on the higher-end.

(2) Profit margin of TSLA cars without the green credits from gov't and tax breaks from any US gov't alternative energy research incentives; any risk from regulatory landscape due to the most recent US regime change.

(3) The trajectory/projection of household solar panel adoption pegged to the trajectory of traditional energy cost trends (e.g., natural gas and oil commodity price due to recently supply glut); the break-even number of new households growth for SCTY division or a number that Crude/Gas need to stay above.

(4) Cash flow projection for TSLA/SCTY as far as I understand it, combined entity relies heavily on fundraising via gov't grant, issuing new bonds and occasional issuing of new equity shares. What percentage of TSLA net revenue goes to meeting bond payments, and what percentage of net income comes from financial engineering vs. sales of cars?

These questions I think could shed critical (both positive and negative) light to otherwise generally very positive but shallow coverage of TSLA on HN? Thanks in advance for any inputs by more informed peeps!

(1) Chevy currently plans to build 30k cars per year, a fraction of the Tesla build numbers, not even taking the Model 3 into respect. I wished they would plan for greater numbers as the electrical car market is large enough for both (and more!)

(2) The Tesla cars are profitable with a 20+% margin - they are growing with 100% year over year and that eats up any profits. There is actually very little government money involved.

(4) cash flow comes from 80+k cars sold this year with a $15 billion backlog on Model 3 orders.

I think the question on (2) may be more focused on - will consumers buy as many tesla cars if they all cost $7,500 more? Will tesla drop the price of their cars instead (thus eating into their profit margin)?

The $7,500 are US-only. Tesla cars are popular outside of the US too. Also, with the new Gigafactory, battery prices will come down. So Tesla has the ability to reduce costs, and if they decide to, reduce prices.

The backlog is from ~2% down 'preorders', so isn't exactly accurate.

Though there is undoubtedly >15bn worth of demand for the M3, especially in light of tax incentives winding down.

It would be very rare, if the demand would be limited to the preorders. Usually the main amount of buys happens after the product becomes available on the market. So I would recon the preorders are a very conservative indicator for the volume in the first year.

(1) Tesla is aiming for 1 million cars in 2020. At an average price of $45,000/car ($42k for Model 3/Y but higher for Model S/X) that would be $45 billion a year in revenue. And they would still likely be growing fast at that point, with expansion in Europe and Asia.

(2) Current gross margin is 25%, but is trending up as they scale Model X. Model S/X gross margin is likely going to be 30% within a year. Tesla is targeting a gross margin of 25% on Model 3. This gross margin is excluding ZEV credits.

Tesla will soon use up the federal tax incentive ($7500 going to buyer) as they pass their 200,000th car sold in the U.S. But they still will have state and ZEV incentives that aren't depending on the federal government. There is risk with the new administration possibly delaying Tesla's autonomous driving plans.

(4) For cash flow analysis, look at Tesla's most recent Q3 financials. It was a breakthrough quarter, as they are selling 25k cars/quarter (100k cars/year run rate). Financials show that S/X gross profit now covers all operating expenses. And when you deduct depreciation expenses and stock-based compensation, Tesla is actually cash flow positive by a large amount (over $400M just last quarter). They used some of that cash for capex, but still have over $100M left over. Tesla's finances have turned a corner, and they look very positive. For Solarcity, they had good Q3 earnings as well. Looks like Solarcity will not impact cash flow for Tesla in Q4 as Solarcity look to be cash flow positive in Q4. Next year, Solarcity's cash flow is projected to be neutral.

Absurdly optimistic. Gross margin is ~20% excluding ZEV on their very high end models, the average price per car will be closer to 60k in 2020, probably around 55k (35k base will probably go to 60-70k with add ons), and Tesla will (maybe) be selling 300-500k cars annually in 2020.

3) accurate

4) Model 3 will be very capital intensive, especially in light of unforeseen problems such as recalls, competition (unlikely in the near term), and consumers opting to get the base model instead of the decked out one. I don't pay attention to solarcity, but generally have mixed vibes about the company. SpaceX, on the other hand, has very positive prospects IMO.

"Gross margin is ~20% excluding ZEV"... where are you getting your data? Have you checked their latest Q3 earnings report?

Here's a quote from their Q3 shareholder letter: "Q3 GAAP Total automotive gross margin was 29.4%, while non-GAAP Automotive gross margin was 25.0% excluding SBC and $139 million of ZEV credit revenue."

source: http://files.shareholder.com/downloads/ABEA-4CW8X0/212351657...

>Tesla is actually cash flow positive by a large amount

Accounting tricks:

http://fortune.com/2016/09/02/elon-musk-tesla-cash-crunch-wo...

There are convenants in this deal whereby SolarCity becomes a subsidiary, rather than a true merger. Tesla won't assume its debt, which is junk. Why do you think that is? SolarCity is in bad shape. You are insanely optimistic.

Regarding the Fortune article, I'm not sure if that's an accounting "trick" as it's more of a risk factor. Tesla gave a resale value guarantee on loans starting over 3 years ago which had a clause that the buyer could sell back their cars to Tesla at end of 3 years for a certain guaranteed price. A very small % of people have redeemed this guarantee, showing that Tesla vehicles are holding their resale value very well. This shows there's low risk for a massive financial loss in their resale guarantees to leasing partners. Sure, there's always risk but the risk of Tesla vehicles suddenly losing a ton of value (much more than expected) seems quite slim.

Regarding Solarcity, yes I've seen reports saying they become subsidiary. But Elon has mentioned a few times that Tesla will assume all of Solarcity's debt.

I found a cool risk arbitrage play here that others may find interesting.

When the deal was announced, it mentioned that SCTY shares were to be converted into TSLA shares at a rate of 0.11 TSLA/SCTY. Yet SCTY shares were priced at close to 0.097 TSLA/SCTY.

This means there was roughly a 12% profit to be made by buying SCTY shares and shorting the equivalent value of TSLA shares, assuming the deal goes through.

I ended up only buying SCTY shares, effectively buying TSLA shares at $182 (when it was at $203). Now TSLA is at $189 so I only made about 4% but had I shorted TSLA at the same time I would have made the full 12%.

All over the course of a just a few months, not bad. It seemed pretty obvious to me that the deal would go through - though hindsight is 20-20.

It's also interesting to consider that now that SCTY has little downside risk and 20% of SCTY shares are held short, if there will be a short squeeze. Seems like SCTY shares are locked at exactly 0.11 * TSLA so I guess I don't see this happening.

Fun, profitable learning experience. :)

i'm not a financial expert, but does that profit margin represent the small chance that the merger wouldn't go through?

can you calculate the exact 'odds' that this arbitrage represents

Yeah I mean this stuff is all priced by the market. So it isn't any chance or odds based on facts, rather based on what the market priced the chance of the deal falling through.

I felt pretty confident the deal would go through, Elon mentioned that he spoke with many institutional shareholders and they were on board with the deal. Just makes sense that he picks up his own company rather than a competitor.

Edit: That's why it's called a "risk arbitrage" play. Arbitrage is when you simultaneously buy and sell the same security at different prices. Risk arbitrage means there's some risk that the securities won't be the same (generally because the merger falls through).

You've described the basic merger arbitrage strategy. There are many hedge funds that exclusively do this type of stuff.

It's risky though. When a deal doesn't go through you can lose a lot more than 12%

Yeah I'm pretty risk tolerant, I went in willing to hold SCTY for the long haul even if the deal fell through.

It's not clear there would have been a long term to hold it for, their financials weren't exactly pretty, and given how heavily dependent they were on debt raises, a rising interest rate environment would have been tough on them...

> assuming the deal goes through.

You're not really doing any kind of arbitrage here you're just gambling that the deal goes through

That's why it's called "risk arbitrage" ;)

Arbitrage is a risk free transaction, so that's an oxymoron.

There is always counterparty risk so there's no such thing as a risk free transaction.

Not a big surprise. Shareholders would approve the acquisition of Theranos if it were Elon at the helm.

This is great news. I wish Tesla and Solarcity all the best. I wish you can render Trump's policies meaningless and help our world to survive.

BTW. After my school in Germany, I had my civilian service in a society called "Solar City <redacted>". It made my mind about alternative energy and it will never change!

Eager to see how this works out. When I had an EV, figured that running it on home solar would cost about half the price the car. With the introduction of "invisible" collection, it's gotta take off.

It would be a pity if they wouldn't.

Edit: congress is investigating solar companies, including Solar City on the tax subsidies they receive.

Not a credible source.

I'm guessing what the article refers to is the entire solar industry being asked about how they calculate the tax credit benefits. Very different from that click-bait title.

http://www.wsj.com/articles/lawmakers-probe-tax-incentives-r...

Wow, that site is pretty terrible. The only sources it seems to reference are the site's own articles.

Plenty of places do this now to keep click traffic (and thus ad viewing-ness) in house.

Yes, legitimate news outlets do this with actual reporting to back it up.

That's not a real news article!

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