SolarCity value miscalculated by $400 million in Tesla merger

SolarCity value miscalculated by $400 million in Tesla merger

A Securities and Exchange Commission (SEC) filing by Tesla on Wednesday revealed that the investment bank that advised SolarCity on its sale to Tesla, Lazard Ltd, double-counted some of the company’s projected indebtedness, resulting in a $400 million undervaluation.

At what first seems like a fairly significant $400 million mistake in the $2.6 billion purchase of U.S. solar PV company SolarCity by Tesla Motors has not affected the deal between the two companies, which is due to go ahead as planned. However, the SEC filing also revealed that Tesla CEO Elon Musk first suggested the merger to his cousin, and SolarCity CEO, Lyndon Rive in February 2016, which could add to a certain level of suspicion from Tesla shareholders over the acquisition.

Tesla’s regulatory filing showed that Lazard double-counted $400 million of the company’s projected indebtedness under its revolving credit facility, which led to an equity value of between $14.75 and $34.00 per SolarCity share. However, with this extra $400 million of debt taken away from the company, the real valuation range should be $18.75 to $37.75 per share.

Lazard picked up the mistake, which was listed as a “computational error” earlier in the month and reviewed it with the Special Committee, set up for the merger, on 24 August. However, according to the filing, the error will not change the previously agree purchase price of $25.37 per SolarCity share, which will be paid for with Tesla Stock.

Initial merger discussion

Interestingly, the SEC filing also revealed that Tesla CEO Elon Musk first suggested the merger of the two companies to his cousin, and SolarCity CEO, Lyndon Rive in February. This was before a presentation on the idea was presented to the Tesla board on 29 February, and a full four months before the Tesla directors could fully consider the merger in May.

Some of the Tesla shareholders have already shown some opposition to the proposed merger, some even selling their stock in protest. With Elon Musk and Lyndon Rive making various stock acquisitions of SolarCity around this time, and given the close ties between the two companies, this initial conversation between Musk and his cousin could add to certain existing suspicions that the merger is not in the best interests of Tesla’s shareholders.