When it was announced that electric car manufacturer Tesla was buying SolarCity for $2.6bn (or £2bn) it raised a few eyebrows – not least because Tesla’s chief executive Elon Musk described the deal as a “no-brainer”. However, shares in both companies slipped after the announcement, which suggests that many analysts do not necessarily share Musk’s outlook. So let’s look at some of the details behind the company purchase to see if we can understand exactly why it has happened and whether Tesla is right to buy SolarCity.
What is Tesla?
Tesla is an American motoring manufacturer that specialises in electric cars as well as battery products. Named after the inventor Nikola Tesla, the company pushes the boundaries of electrical technology. Musk is also famous for his desire to move forward human spaceflight and develop a colony on Mars, as well as for his enormously successful earlier ventures including PayPal and X.com.
Aside from electric cars, Tesla is also a pioneer in battery products such as the Powerwall home battery, which is designed to store any excess energy produced by home solar panels. This is one of the most important aspects of solar power as it has long been challenging to store the energy so that it can be used at a later point.
What is SolarCity?
SolarCity specialises in solar power systems, including everything from designing and installing solar panels to providing loan funding for customers to have them placed at their property. Interestingly,
Musk already owns 22%of SolarCity and is already CEO and the chairman of the company. SolarCity has recently begun focusing more on financing loans that allow homeowners to purchase solar panels.
Why is Tesla buying SolarCity?
So given that Musk already owns a part of SolarCity and is so heavily involved in the business – why is Tesla buying it? To answer that we need to look at the Powerwall batteries that Tesla sells. Musk has claimed that whenever they attempt to sell the batteries, they almost always have to answer questions about solar panels and solar power. But as Tesla doesn’t currently have the capability to sell solar panels themselves, they are not able to offer the combined service that many customers want.
Musk believes that when Tesla can sell solar panels directly, they will be able to offer the Powerwall as an obvious upgrade. That makes sense on the surface – so why have both companies’ shares slumped since the announcement was made?
It seems that there is actually a significant amount of controversy surrounding the purchase of SolarCity. This is firstly because SolarCity is owned by Lyndon Rive, who is the cousin of Elon Musk. That might already trigger alarm bells, but they go into overdrive when you consider the next point: SolarCity is effectively $6bn is debt.
Despite the fact that SolarCity has increased its number of customers significantly (it currently has 275,000 compared to 168,000 last year), it has some of the highest levels of debt in the solar power industry. This has led some to suggest that Musk is essentially using Tesla to bail out SolarCity at a huge cost to Tesla’s shareholders.
This also comes a difficult time for Tesla as it is currently in production for the brand new Model 3 electric car which the companies needs to be a financial success. If it turns out that the Model 3 is less successful than Musk and has team imagines, it could make things very difficult for the company if they have to deal with the debt from SolarCity as well.
Written by Mike James, an independent tech blogger working together with Best VPN.