News from Tesla was recently released reporting that the electric automobile company is planning on acquiring SolarCity. The news came as a surprise to traders early Wednesday. As a result, traders bit up SolarCity by 13% and drove Tesla down by 12%. During an acquisition, it is normal for the stock market to spike the target and drag down the buyer. SolarCity has a debt-to-equity ratio of 3.492 as of March 2016, while Tesla as a ratio of 3.215. Tesla is currently in a unique position because the market for electric cars is still considerably underdeveloped. Competitors such as Fiat Chrysler and General Motors still have lower ratios in the industry.
Good news for Tesla is that most of SolarCity’s debt is project-level debt. Michael Morosi, of Avondale Partners, notes that the debt is consolidated on the SolarCity balance sheet, and is set against their cash flow producing assets. What that means is that the debt behaves like that of a mortgage debt instead of credit card debt. SolarCity has a highly visible burn-rate and is yet to break even. Tesla will have to deal with the debt before they can proceed with their plans for expansion.
“Tesla doesn’t view this as a reaction to GE breathing down their necks,” said Troy Ault, Director of Research at Cleantech Group.
Tesla and SolarCity do have a history however, as Elon Musk and Antonio Garcias both have overlapping roles between the two companies. The generous 21 percent to 30 percent premium that Tesla gave SolarCity were affected by markets because of the post announcement shift in price. Tesla is currently 4 years away from its target of hitting full capacity, and therefore is making a bold move by acquiring SolarCity. Most experts claim that SolarCity will continue to operate at their normal pace, even after the transaction is completed. This is mostly because Tesla is busy completing the release of the Model 3. SolarCity’s immediate role within Tesla was not reported.