Tesla Motors Inc (NASDAQ:TSLA) shares are falling 8.5% following the news that the electric car giant plans to acquire SolarCity Corp (NASDAQ:SCTY) for $2.7 billion (midpoint $27.50/share), representing a 30% premium over yesterday’s share price of $21.19.
However, Roth Capital analyst Philip Shen remains sidelined due to the uncertain outcome of the offer and required shareholder approval. The analyst expects this to be a challenging acquisition given the integration of two different types of companies and cultures.
Shen wrote, “If this acquisition comes to pass, the risks and challenges of the SCTY model would be commingled with the risks and opportunities of TSLA. While we acknowledge the virtue of Mr. Musk’s clean energy vision and mission (philosophically we support them), we do wonder if his vision truly needs to happen through the integration of these two companies. Is the risk/reward calculus better with the two companies together or separate?”
The analyst continued, “With this acquisition, we believe TSLA would be greatly confounding its story to a heretofore loyal investor base. SCTY once had a large, loyal investor base too. TSLA will likely now test its shareholders’ patience as its investor base must quickly come up to speed on what is required (1) to run national solar EPC operations, (2) to systematically drive the cost of solar financings lower, and (3) to greenfield a world class solar cell manufacturing and module assembly facility. Finally, the deal potentially raises corporate governance issues. All in, we recommend SCTY shareholders to take this offer at the proposed price (though it is a moving target with its fixed share exchange ratio) if TSLA shareholders manage to approve the merger.”
The analyst reiterated a Neutral rating on shares of SolarCity, with a price target of $19, which reflects a potential downside of 18% from last closing price.
According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Philip Shen has a yearly average return of -18% and a 25% success rate. Shen has a -37.5% average return when recommending SCTY, and is ranked #3871 out of 3984 analysts.
Out of the 16 analysts polled by TipRanks, 6 rate SolarCity stock a Buy, 8 rate the stock a Hold and 2 recommend to Sell. With a return potential of 28%, the stock’s consensus target price stands at $29.83.