28 October 2016 Tesla & SolarCity: As easy as pie? INDUSTRY BACKGROUND difficult for anyone to know, as financial insiders and analysts, On 29th August, every Tesla of this moment, whether or not the business press, and the SUMMARY employee received an email the presumably accretive public alike. We certainly know The merger of Tesla and SolarCity from CEO Elon Musk to let them cultural and philosophical fit the outcome desired by Elon could be a game-changer for Elon know, directly, that “the third between Tesla and SolarCity will Musk – as he himself wrote to Musk – and his shareholders. quarter will be our last chance indeed play out in such a way Tesla employees in the August that their mutually addressable email, “it would be awesome to While consensus sentiment to show investors that Tesla can surrounding the acquisition has be at least slightly positive cash market grows, synergies are throw a pie in the face of all the been negative, investors and flow and profitable before the realised, and performance naysayers on Wall Street who commentators might focus more on Model 3 reaches production.” improvements are keep insisting that Tesla will the synergistic opportunities of the operationalised.” always be a money-loser!” transaction as there are significant Just two months prior, Tesla, on gains to be realized. the heels of ramping production In the three months since, Here, FTI Intelligence presents capacity for its not yet delivered precisely because these its view on the transaction, one FTI Intelligence has analysed the questions remain, the markets that is informed by our technical potential synergies that could be Model 3 sedan and still generated from the transaction and completing construction of the have on balance grown expertise in merger integration, identifies these as the catalyst that Nevada Gigafactory, had increasingly pessimistic about identifying and implementing will generate the economies of scale proposed to acquire the cash the transaction, expressed via operational efficiencies, a deep required to be successful in their flow negative SolarCity. the stark quantum of the two understanding of both corresponding verticals – and companies’ stock prices. Tesla, residential and commercial deliver value to all stakeholders. At the time, FTI Intelligence since the 20th June solar markets, and finally, our published a Spark – Energy announcement has seen over 7 familiarity with the capital Insight called Let the sparks fly: percent of its market cap erode, markets, as we seek to the (net) meter is running on while SolarCity has fallen 16 determine whether Elon Musk Tesla’s bid for SolarCity, percent – substantial proof the can have his pie, and throw it, seeking to identify and analyse market questions the likelihood too. the multiple factors weighing of the transaction itself. upon the ultimate success – or FTI SPARK VIEW failure – of this proposed The basic question of “can this Understanding the ingredients EXPERTS combination. transaction work” continues to From the day of its Robbie Goffin be the subject of generally announcement, multiple Managing Director As we observed then, “it is negative (if at times melo- audiences sought to make +1 415 293 4460 dramatic) scrutiny from sense of the announced [email protected] Stock Price Chart merger, quantify its economic drivers and rationale, and have Carl Jenkins 30% clearly had difficulty in doing so. Managing Director As the largest shareholder of +1 303 689 8877 20% both companies, Elon Musk [email protected] was and is, fairly or not, in an 10% enormously delicate position Chris Hollern with regard to potential Consultant 0% conflicts. Certainly, it did not +1 303 689 8883 -10% help assuage concerns about [email protected] process when subsequent -20% regulatory filings showed one of Aris Karcanias the investment banks retained Managing Director -30% by SolarCity to advise on the +44 20 3727 1282 merger inadvertently [email protected] discounted the value of the company by $400 million. ‪@FTIConsulting‪‪‪‪‪‪‪‪‪‪‪ S&P 500 Index Tesla Motors, Inc. SolarCity Corporation www.fticonsulting.com Source: Bloomberg, 2016 While FTI has significant market) is a straightforward and revenue problem per se. “In our view, the commercial expertise when it low cost marketing program to Rather, the issue confronting comes to properly valuing execute. The reverse, equally, both companies is profitability. success or failure of energy assets, what we would is true – there are roughly Thus, when looking to quantify the transaction is, first, say here is this: in our view, the 140,000 Tesla vehicles on the the impact of the merger on the a far greater function success or failure of the road in the United States, and combined entity, a key question transaction, at current certainly many of these owners is to identify whether or not of whether or not the proposed prices, is, first, a far will be receptive to an there are opportunities to combined company greater function of whether or integrated, clean energy reduce expenses, and the can realise the not the combined company can solution. magnitude of those reductions. realise the potential synergies potential synergies available to it, and second, Increased product awareness, a Due to the distinct nature of available to it, and whether the capital markets will strong brand, providing a fully each of the business segments, second, whether the reward these synergies with integrated solution – while the simple truth is that ongoing access. pundits may aggressively meaningful cost economies of capital markets will debate the degree to which scale are not going to be an reward these synergies Further, FTI Intelligence would these customer bases will impactful source of cost with ongoing access.” also observe that while revenue overlap and spur additional savings. While FTI typically synergies are likely available, sales, FTI Intelligence believes it looks for cost structure when it comes to the core value is disingenuous to imagine improvements from improved driver of the acquisition, we there will be no revenue benefit supply chain management, end believe the proper rational- at all. Further, an integrated to end workflow optimisation, isation and management of offering, marketed by an and focusing on multichannel expenses – in particular, integrated salesforce, should at manufacturing efficiencies, we Selling, General & some point provide an ultimate see consolidated Administrative (SG&A) expenses opportunity to reduce not just improvements in the Cost of – will be crucial. the overall cost of sales, but Goods Sold ranging from 0.5 – improve competitiveness 1 percent. Revenue thanks to bundled pricing. From a revenue standpoint, the With a consolidated COGS of merger of the two companies As far as the numbers are just under $7.5 billion, we’re has been held as an opportunity concerned, that translates to looking at potential savings to deliver a philosophically the following: with combined FY ranging from $38.5 million to EXPERTS consistent product line across a 2017 revenues expected to be $80.6 million. Robbie Goffin broader customer base, under a $9.3 billion (based on con- Managing Director brand that is immediately sensus growth estimates of Kicking SG&A +1 415 293 4460 recognisable and identified not 32.9 percent for Tesla and 67.9 Far and away, the largest [email protected] simply with happy consumers, percent for SolarCity) projected impact of the merger will be but passionate ones. revenue synergies are expected realised through the reduction Carl Jenkins to range from a low of 3 percent in costs associated with selling, Managing Director Further, renewable energy to a high of 8 percent (based on marketing and general +1 303 689 8877 presents adopters with two FTI’s experience). overhead. As it stands, SolarCity [email protected] interrelated issues: generation, in particular has been and storage – put simply, In turn, we can expect the effectively managing a broad Chris Hollern generating energy during the combined company to realise reduction in its installation Consultant day only solves half of your between $279.2 million and costs, by far its biggest +1 303 689 8883 problems, assuming you would $744.7 million in additional expense, driving them steadily [email protected] like to be able to turn on your revenues – which is to say, down from $2.40 per installed lights at night. even at the low end, a Watt in Q1 2014 to &1.98 per Aris Karcanias consequential amount. Watt in Q1 2016. SolarCity’s Managing Director Integrating and selling Tesla’s stated goal is to ultimately +44 20 3727 1282 home battery storage solution Expenses reduce its installation costs by a [email protected] to SolarCity’s existing installed Revenue increases are one further 50 percent thanks to customer base (currently, over thing, but as many have and will lower hardware pricing and ‪@FTIConsulting‪‪‪‪‪‪‪‪‪‪‪ 300,000 households, or continue to point out, neither initiatives to reduce other soft www.fticonsulting.com approximately one-third of the Tesla, nor SolarCity, have a costs. At the same time, however, and mortar stores will equally reported by other, established “In other words, without sales costs have been benefit SolarCity’s offering. auto manufacturers (Ford and making hyperbolic challenging, and quite nearly GM are on either side of 10 doubled from Q4 2015 to Q1 General and administrative percent). assumptions one way or 2016, rising from $0.54 to FTI’s long experience in merger the other, there is a $0.97 / Watt as fixed costs integration is that, properly So, if the estimated synergy scenario where the were amortised over lower executed, our clients typically value improvements on the volumes. Sales costs clearly benefit from streamlining expense side range from 20 to combined company is have significant room for organisational structures and 30 percent, this in turn EBITDA positive at the reduction, not just from recent consolidating administrative suggests available synergies end of 2017 to the tune levels but even further below functions.