Tesla Motors, Inc.-SolarCity Deal Takes Critical Step Toward Closing

By Markets Fool.com

Image source: Tesla Motors.

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Electric-car and energy-storage maker Tesla Motors (NASDAQ: TSLA) moved one step closer to closing its acquisition of solar-panel maker SolarCity (NASDAQ: SCTY) on Monday. About a month after Tesla announced its offer to acquire SolarCity, the two companies have now reached an agreement to be combined. If the deal closes, Tesla will become the world's first vertically integrated sustainable energy company.

Here's what investors should know about the deal.

Details of the deal

Tesla will acquire SolarCity in an all-stock transaction, valuing the solar company at $2.6 billion based on the five-day volume-weighted average price of Tesla shares as of market close on Friday. Under the terms of the agreement, SolarCity shareholders will receive 0.11 Tesla common shares for each SolarCity share, or $25.47 of Tesla stock as of market close on Friday.

Notably, the deal was approved by independent members of the Tesla and SolarCity boards of directors. Board members with significant interests in both companies, including Tesla CEO Elon Musk, were recused from the voting process. Musk is the chairman and largest shareholder of both companies. The independent members of the two companies' boards were also advised by independent legal and financial advisors.

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Investors should be careful to note that the deal has not closed yet. Not only must it be approved by a majority of disinterested shareholders from both companies, but the terms of the deal also give SolarCity a 45-day "go-shop" period in which the solar company can solicit alternative proposals.

Tesla expects the deal to close during the fourth quarter of 2016.

In most acquisitions, it wouldn't be until Monday's announcement of detailed terms of a deal that a potential acquisition would even be announced. Tesla and SolarCity, though, announced the potential deal at the offer stage in order to give investors more transparency -- a move that made sense in light of Musk's role as chairman at both companies.

Why is Tesla buying SolarCity?

Tesla gave investors insight on Monday into its reasons for the acquisition.

Mainly, Tesla aims to tap into SolarCity's business so it can offer residential, commercial, and grid-scale integrated solar and energy storage products. The two companies believe these products will "improve the way that energy is generated stored and consumed," Tesla said in a blog post on Monday. These products will all be offered under a single brand, "providing customers with an aesthetically beautiful and simple one-stop solar [plus] solar experience."

"Now is the right time to bring our two companies together," Tesla said.

Image source: Tesla Motors.

The acquisition follows Tesla's completion of the first major phase of its Gigafactory, or its factory for building batteries for electric vehicles and energy storage products at unprecedented scale. While the factory is only 14% complete, production of energy storage products is already under way at the company.

The deal also comes in conjunction with SolarCity's preannouncement of second-quarter operating metrics on Monday. The preannouncement of operating metrics also noted SolarCity's plans for new solar products, which it expects will boost demand in 2017.

We anticipate two new product releases in the second half of the year that we expect to meaningfully impact [megawatt] installed in 2017. These include (1) a new, integrated solar and storage offering and (2) a new solar product focused on the 5 million new roofs installed each year in the U.S.

By bringing the two companies together, Tesla expects to achieve $150 million of cost synergies within one year of closing.

We also expect to save customers money by lowering hardware costs, reducing installation costs, improving our manufacturing efficiency and reducing our customer acquisition costs. We will also be able to leverage Tesla's 190-store retail network and international presence to extend our combined reach.

The acquisition would have significant meaning for shareholders of both companies. For Tesla, this would mark a clear foray into a new segment. While this could eventually diversify Tesla's revenue, it's unclear just how successful an integrated solar and energy storage product will be. And SolarCity shareholders will now have to decide whether they want to sell shares before the deal closes, or become Tesla shareholders.

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Daniel Sparks owns shares of SolarCity and Tesla Motors. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.