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Tesla and SolarCity executives aim to quell naysayers before vote

Elon Musk
Tim Rue | Bloomberg | Getty Images
Elon Musk

Tesla and SolarCity executives are attempting to quell naysayers as shareholders for both companies prepare for a vote on whether the carmaker and solar power company would be better off together or apart.

Senior executives made the case Tuesday that SolarCity is on solid financial footing and it won't be a drain on Tesla.

Tesla said it expects SolarCity to add more than half a billion dollars in cash to Tesla's balance sheet over the next 3 years, as it moves to create the world's "only integrated sustainable energy company."

"The bottom line is that we expect the acquisition of SolarCity to bring significant financial benefits to the combined company," Tesla said a statement to investors.

Tesla Chief Executive Elon Musk, who is chairman of SolarCity and the largest shareholder of both companies, has been making the case for the tie-up since the deal was approved by SolarCity's board in August.

Shareholders of both companies are set to vote on the merger on Nov. 17.

Tesla has argued that acquiring SolarCity is absolutely necessary to fulfill Musk's goal of creating a fully integrated sustainable energy company "capable of developing, producing, selling, installing, and servicing these products in the most seamless way possible."

Still, skepticism has surrounded the transaction, with some critics calling the deal a poor use of Tesla's cash, a distraction from Tesla's car-making business, or even a bailout for SolarCity, which counts Musk's relatives among senior management.

Finances lie at the heart of the criticisms of both companies.

SolarCity's revenue has grown rapidly over the years, but high costs have largely kept the company from achieving profitability. Tesla announced its second profitable quarter ever on Oct. 26, but critics said profitability was achieved through revenue from government-issued Zero Emissions Vehicle credits, and that the company delayed capital expenditures that will be eventually necessary.

"For those that predict a bad outcome," for the merger, Musk said on a call with analysts, "how good have they been at predicting the outcome for Tesla in the past? And if they have been uniformly…. If they have a batting average of zero, you should really question whether there future predictions are going to be better."

In making its case Tuesday, Tesla said it expects SolarCity to immediately account for 40 percent of the assets of the combined company on a historical cost basis and to contribute more than $1 billion in revenue in 2017.

What's more, Tesla said that given its "recent execution and our future production targets, there is no economic need to raise more capital now."

Tesla noted SolarCity demonstrated its own financial strength by securing about $1 billion in project financing since July 1.

Analysts and investors also have their eyes on another potential lifeline. Tesla also currently has a partnership with Panasonic, which supplies the lithium-ion cells for Tesla's batteries, and has invested in the company's battery-making Gigafactory in Nevada. Tesla and Panasonic announced a similar, but tentative, agreement to make solar cells at a factory in Buffalo, New York, if the Tesla/SolarCity merger is approved. Musk said on Tuesday's call that he is optimistic about the future of the relationship.

Also, as SolarCity continues its move away from leases in favor of loans and cash transactions, its GAAP revenue and profitability will significantly improve, Tesla said. The company added, Tesla's network of lenders can also aid SolarCity in this transition.

The release also added that more than half of SolarCity's debt is project financing, which is non-recourse and "more than offset by the cash flows from customer payments."

Tesla said it expects to realize $150 million in savings the first year through steps such as cross-selling Tesla and SolarCity products, getting rid of of overlapping research and development and product development, and reducing overhead.

Over the last several weeks, Musk has been setting the scene for what the combined company could create and provide. Perhaps the best example of this potential was showcased last Friday — Musk unveiled a "solar roof" made of ordinary-looking shingles that could collect energy, along with an integrated Tesla wall battery.

Both Tesla and SolarCity shares had been trending lower ahead of the announcement, and in after hours trading were down 1.31 percent and 2.46 percent, respectively.