Risky business: Mercom Capital CEO Raj Prabhu on Tesla's proposal to buy SolarCity


pv magazine: Responses from the investment community and the press have been all over the map between praise and ridicule. What are your initial impressions of this deal?

Raj Prabhu: I am little skeptical at this point – shareholder reaction has not been positive. Tesla shares were down after the announcement.

Both companies have the same majority shareholder, the companies are run by family members, and board members have ties to both companies, all of which can create governance issues. With this deal, Tesla will also be taking on a lot more debt raising questions about the company’s future prospects.

pv magazine: Can you talk about the specific dangers that you see here?

Raj Prabhu: Based on Tesla’s stock price after the announcement (which was down), shareholders have not liked the deal so far. At the end of the day, it all comes down to shareholders. It would be a different deal if they were private. The shareholders of Tesla are there because it is a high-end electric automobile manufacturer. SolarCity’s shareholder base is invested in rooftop solar.

If the shareholders don’t like the deal, considering that this deal will more than double the debt of Tesla once you add SolarCity’s debt, and the stock price goes down, it could become a downward spiral, and it becomes very difficult after that.

Shareholder reaction will be the most important thing, and everyone will be watching that.

pv magazine: Do you believe that there are real product and operational synergies here?

Raj Prabhu: Based on the company announcement, they are looking at a similar customer base. They believe that anyone who buys a Tesla is also a potential customer for rooftop solar, and vice-versa. The installation expertise of SolarCity will be important, as the Powerwall comes into the market.

The company’s believe that Tesla’s high-tech manufacturing capabilities can be leveraged on the solar side, which I think remains to be seen. SolarCity’s expertise in terms of financing rooftop projects, leases and loans, they plan to leverage on the Tesla side to finance cars.

These are the benefits on paper at least, which are the stated reasons behind this proposed merger.

pv magazine: If the merger goes through, what could be the impacts for SolarCity’s gigafactory in Buffalo? Could this bring in additional financial stability for that project?

Raj Prabhu: I can’t say for sure at this point. It all depends on how the shareholders react.

Post-merger if the stock value goes down, financing becomes expensive. No matter what the company and the management thinks about the synergies they have, the shareholders have to buy it.

pv magazine: Clearly Elon Musk could have done this before. Why is this happening at this time?

Raj Prabhu: Apparently, this has been on the table for a while. SolarCity shares were at $60 less than a year ago, now it is in its 20s. The stock price has fallen enough to make it an attractive acquisition. That is the most obvious reason that I see, in terms of timing.