Seminar Week 6 - Tutor = Nickolay PDF

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Tutor = Nickolay...

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Mergers and Acquisitions Seminar Week 6 Tesla Overview of the case Tesla are looking into acquiring SolarCity  both are young and high growth but have been losing money  both offer complimentary products and combining them may present a good strategic fit? Potential that people will switch to electric cars and solar panels  renewable energy is a growing trend. Elon Musk: -

2002 founded SpaceX. 2003 co-founded Tesla. Musk was the largest shareholder in both Tesla (22%) and SpaceX (54% but 78% voting control). Musk also owned 21% of SolarCity. Musk’s stock was financed by personal loans.

Case Brief Overview of companies Market reaction to acquisition Is it a good proposition? A strong strategic or financial fit?  would investors put more weight on strategic or financial factors? 1. As a potential investor, what is your assessment of the prospects for SolarCity's business? Evaluate (+ or -) SolarCity's position from the point of view of regulators, climate change trends, technology innovation, industry capital and research and development (R&D) intensity, and its affiliation with Tesla. - Governments are increasingly trying to invest in renewable energy. - SolarCity was a beneficial firm and helped encourage positive climate change trends, especially as people drifted towards renewable energy. - Likely that SolarCity could not sustain technology innovation after making a loss, so future prospects look bleak. - Sales growth were increasing, which looks hopeful. - Tesla and SolarCity invest heavily in CAPEX and R&D – a main reason for its negative cash flows and profits. - SolarCity were already affiliated with Tesla through Elon Musk being a SolarCity board member.

2. Is SolarCity a strong strategic and financial fit for Tesla? As a board member, would you put more weight on strategic (qualitative) factors or financial (quantitative) factors? -

A strong strategic fit as both firms have the potential to experience cost synergies. A weak financial fit given both firms poor profit performance, and SolarCity’s high levering. Given the growth and trends of Tesla, the financial factors are likely to resolve themselves, so put more weight on strategic factors. Potential conflicts of interest  Elon Musk’s powerful role in both companies. Stock changes show a negative market reaction for Tesla, Positive market reaction for SolarCity.

3. Which of the comparable companies appear to be a good match with SolarCity at the time of the case? What type of companies would be a good match to SolarCity in 10 years? Use comparable company analysis to value the deal. -

SolarCity suffer from negative EBITDA – so using this will not be a good approach. Using EV/Sales:  Shanghai Aerospace seems to be a clear outlier  should we exclude?  Calculate implied price based on EV/Sales; ((revenue in 2016 x EV/Sales for each company) / total shares outstanding) /2  divide by 2 for the half debt, half equity.  Take the average of all implied prices.  Conclude that share price is too expensive. - Can also take the average EV/Sales (ignoring Shanghai), then compute one implied price. 4. What impact do precedent transactions have on your perception of the industry and the valuation of the company? Use the precedent transactions to value the deal. -

Gestamp – KKR appears to be an outlier (should we exclude?) Compute premium for each transaction, then compute implied price for SolarCity. Take share price without premium x premium based on precedent transaction = implied price. SolarCity appears overvalued by Tesla at 35% premium. Precedent transactions may not be very useful.

5. Do you agree with the valuation of SolarCity and Tesla? If not, what changes would you make to the discounted cash flow (DCF) analysis? -

Driven by management assumptions. Need to compute new value of levered beta  rearranging capital structure. New WACC = 8.43% Find value of FCF and TV. TV = 378.17 * 1+g , then discount back. EV consists of 50% debt and 50% equity.

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Implied share price based on DCF = 34.02  gives a higher valuation that the one suggested in the case study. DCF is probably better due to their unpredictable revenues (young companies). 0.082 Tesla Shares per SolarCity share 4% is a high growth rate  more car manufacturers will be producing electric cars so growth may fall. SolarCity is a strong strategic deal for Tesla  likely to buy a larger premium.

What happened? 85% of Tesla Shareholders voted in favour of merger. 1 SolarCity share received 0.11 Tesla Shares  $20.75 per SolarCity or 1.7% premium  deal value = $2bn. Deal was renegotiated twice due to widespread criticism. Low prices, increasing competition and less government focus on renewable energy has worsened both company’s prospects. In late 2017, Tesla decided to shrink SolarCity capacity and lay off hundreds of workers....