Elon Musk makes a mistake

And his stock will open down 10% tonight in the US just to make sure he knows it.
Musk’s Tesla contracted to buy Solar City last night in a deal worth US$2.8b for the equity but which will also mean the assumption of a chunk of debt which may be quite a bit larger than that.
The commentariat will make much of the fact that Musk and Tesla have a conflict of interest because a co-founder of SolarCity is Musk’s cousin, Lyndon Rive, while Musk is chairman of both companies. If this deal made sense, shouldn’t Exxon own GM?
Conflicts will be an issue, but one that will be dealt with by the various boards, auditors and assorted governance bodies, who will no doubt sign off. The real problem is in the numbers. Tesla is a US$30b company (before off-balance sheet liabilities, which may or may not include a US$5b battery factory in Nevada) so outlaying/shouldering SolarCity’s US$5b of incremental liabilities is not trivial. Especially against a backdrop of the very significant working capital requirement that Tesla is up against.
Remember, the company has sold around 400k Tesla 3’s (great!) which it now has to build before it can paid – at a cost which will likely be US$10b.
This was no secret, and Tesla raised US$1.4b last month to shore up the very tight balance sheet (current assets at US$3.2 were only US$53m more than its current liabilities).
But shareholders who ponied up the readies thought they were financing cars around the world, not their cousin’s US residential solar panel business. And the stock may stay below the price at which their shares were issued, which isn’t a good look.
Musk says the deal makes commercial sense; there may be something to that, since any electric car buyer would also likely be interested in a cross-sell of the Tesla power wall, so why not throw in the rooftop solar as well, and lock the consumer into a 10 year financing deal.
But residential power isn’t a must have in the way that working capital for pre-sold cars is, so SolarCity could be one wafer too many.
As noted, Musk will feel some pain tonight, with the stock likely to close 10% down below $200, but in truth shareholders will continue to back the company because in the end, the electric car is inevitable.
But it’s a confidence game, so it is important that Musk finds a way to quickly rebuild the trust he has just burned, because he will need access to capital again.