There will be big movements on the 'renewable energy' stock front today, thanks to Elon Musk. Waking up this morning we were greeted with the news that Tesla Makes Offer to Acquire SolarCity Given the huge cash burn rate of both companies, this will be a pure script deal. The current proposal is:
"Subject to completing due diligence, we propose an exchange ratio of 0.122x to 0.131x shares of Tesla common stock for each share of SolarCity common stock. This proposal represents a value of $26.50 to $28.50 per share, or a premium of approximately 21% to 30% over the closing price of SolarCity shares, based on today's closing price of SolarCity shares and the 5-day volume weighted average price of Tesla shares."
Given how integral battery packs are to solar power and vice versa, the merger makes sense on that level. You would be able to get energy from the sun, store it on your Tesla power wall and then charge your car when you get home, none of this using electricity generated from coal fired power stations to run your 'clean' electric vehicle. The other advantage is that it makes it easier for Musk to keep an eye on both companies with the creation of what Seeking Alpha called the "ultimate alternative energy conglomeration".
Why has the Tesla share price dropped 12% on the news?. Solar City does not make money selling solar panels, they make money off the financing of the solar panels, which is risky due to most of the loans having 20 year pay back periods. Also Solar City like Tesla, is currently loss making so the need to raise cash going forward will need to be stepped up. All in all Tesla buying Solar City increases the risk factor of the company but also increases the potential for up side.