Tesla's Bid Suggests 'Very Little Value' In SolarCity; Gordon Johnson Maintains Sell

After Tuesday's market close, Tesla Motors Inc (NASDAQ: TSLA) announced it had made an all-stock bid to acquire SolarCity Corp (NASDAQ: SCTY) for $26.50-$28.50 per share.

Axiom’s Gordon Johnson maintained a Sell rating on SolarCity, with a price target of $7.

Very Little Value

“According to the 8-K, TSLA’s basis for acquiring SCTY is to “complete the picture”; that is, Tesla is bidding to become the only integrated energy company w/ “end-to-end” products,” Johnson mentioned.

The offer represents a 25-34 percent premium to SolarCity’s closing price on June 21.

“As we fail to fully grasp the rationale behind TSLA’s proposed acquisition of SCTY, we believe yesterday’s announcement suggests SolarCity has very little value,” the analyst said.

Related Link: JPMorgan On Tesla/SolarCity Deal: 'You Can't Put The Genie Back Into The Bottle'

Johnson believes there would be few synergies between the two companies, apart from renewable energy, and explained that in the absence of a technological advantage and both Tesla and SolarCity burning cash, the merger could results in meaningful negative EPS accretion.

Also, while the bid represents a premium to the closing price on June 21, it is still 44.6 percent below SolarCity’s average price in 2015 as well as below the average price year to date in 2016.

Johnson pointed out that Tesla would require an additional $2,1 billion in equity, which would “dilute existing TSLA shareholders by another 6 percent.”