Elon Musk set to pay billions if he loses lawsuit over Tesla’s SolarCity deal

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Five years ago, Elon Musk spoke to investors about the acquisition of SolarCity by Tesla, then the leading solar panel installer in the United States. “I’m pretty optimistic about how it’s going to turn out. It’s pretty transformational, ”he said on a call with analysts on Nov. 1, 2016.“ It has been extremely well received at the consumer level, ”Musk said of the estimated deal. $ 2.2 billion. In the same call, he allayed concerns about SolarCity’s faltering financial health. “There are quite a few naysayers on the financial front, some of the big hedge funds, whatever,” the billionaire said, “I see no chance SolarCity will go bankrupt. Zero.”

Musk goes to the Delaware Court of Chancellery on July 12 to defend the deal. He is the only remaining defendant in a shareholder case alleging the purchase of SolarCity was the rescue of a struggling company founded by his cousins ​​in which he was the largest investor and chairman. The lawsuit also accused Tesla’s board of lax corporate governance. The board members, led by President Robyn Denholm, settled $ 60 million last year, admitting no fault. But Musk chose to defend the purchase. A loss in the case could cost him more than $ 2 billion, the total cost of the acquisition, which would be one of the biggest judgments ever against a business executive. As companies such as Bank of America and BP have faced billions in damages for their role in events such as the collapse of mortgage-backed security and the disastrous Deepwater oil spill Horizon, individual leaders are seldom solely responsible for these amounts.

It is the latest legal twist for the 50-year-old centibilaire, founder of the world’s largest electric vehicle brand and rocket maker SpaceX. Musk enjoys a cult-worthy fan base and 58 million Twitter followers, but his track record in defending comments that got him into a tight legal spot is mixed. In 2018, he lost his role as chairman of Tesla and was fined $ 20 million to the SEC for allegations he made about the automaker’s privatization that turned out to be false. A subsequent SEC case over Musk’s Twitter comments about Tesla’s production targets ended without further sanction for the executive. In December 2019, he won a libel case brought against him by Vernon Unsworth, a Thai lifeguard adviser helping a youth football team trapped in a cave Musk called “the pedo guy.”

“When Tesla bought them, they were supposedly going to recapitalize the business and reorganize.”

Joseph Osha, Senior Research Analyst at Guggenheim Securities

At the root of the SolarCity case lie deep concerns as to why Tesla needed to buy it in the first place. Musk argued that it would be a transformational deal that could dominate the solar industry with low-cost panels, Tesla battery storage and high-tech solar roofs. Not only did this not materialize, but there were obvious concerns about conflicts of interest. Musk’s cousins ​​Lyndon and Peter Rive founded SolarCity in 2006, at Musk’s suggestion. Their wealthy cousin financed it, owned 22.2% when Tesla acquired it and had been its president.

“When Tesla bought them, they were supposedly going to recapitalize the business and reorganize. Instead, it really went down dramatically, I think because they weren’t paying much attention to it and it other things were going on, ”says Joseph Osha, senior research analyst for Guggenheim Securities who tracks the solar industry but does not cover Tesla.

SolarCity’s business was based on recruiting customers who paid no upfront costs, but who had signed 20-year agreements to purchase the electricity produced by the solar panels installed by the company. It became the world’s largest residential solar installer, posting a record 2016 revenue of $ 730 million, but also suffered a massive net loss of $ 820 million that year and racked up more than 1.5 million dollars. billion dollars in debt at the time of purchase.

Much of the company’s growth – and its debt – was linked to its marketing. Under the Rive brothers, the solar company had grown rapidly by relying on expensive promotion, including intensive advertising and door-to-door sales, and by offering long-term leases at low prices for its solar systems. ‘solar energy. It also displayed red ink quarter after quarter as it rushed to ramp up installations.

Weeks before the acquisition closed, Tesla hosted a glowing media event at Universal Studios in Hollywood on the set used for “Desperate Housewives” to show solar roofs made from high-tech glass shingles. Musk said at the time that the product would be a game-changer, as the roofs would both generate clean energy and eliminate aesthetic flaws in traditional photovoltaic panels that greatly irritate the world’s third richest man. “The key is that it has to be beautiful, affordable, and seamlessly integrated,” he said.

After the acquisition, Tesla eliminated SolarCity’s high marketing costs by shifting sales directly to its website and store network. He ended a sales partnership with Home Depot. The Rive brothers had both resigned in July 2017, months after the sale of their business was finalized. “There were certain sales channels that we felt weren’t consistent with the Tesla brand, like door-to-door, kind of knocking on people’s doors, so we wanted to make the transition to them instead. sales in Tesla stores. It makes more sense, which I think we mentioned as one of the justifications for acquiring SolarCity, ”Musk said in a June 2019 deposition in the investor lawsuit.

Tesla’s power unit, which contains what remains of SolarCity’s operations, posted revenue of $ 1.99 billion last year, up from just $ 178 million in 2016. That growth does not This was not due to panel installations, but rather to the rapidly growing sales of “Powerwall” batteries. which store electricity from solar panels, a product Tesla started selling more than a year before the deal was announced. At the same time, panel installations, SolarCity’s core business, reached 205 megawatts in 2020, a quarter of the 803 megawatts it boasted as a stand-alone business in 2016.

Tesla reported a jump in solar installations to 92 megawatts in the first quarter of 2021, without specifying whether they were residential or commercial projects. He also said solar roof activity increased nine times from the previous year, without providing precise figures. Despite these gains, the battery business Musk had prior to the acquisition “is the wagging tail,” Osha of Guggenheim said. “Powerwall is such a great brand that they can sell Powerwalls all day.”

In the 2019 deposition, Musk said production challenges with the Tesla Model 3 electric vehicle in 2017 led to the redeployment of staff and engineers from SolarCity to help strengthen vehicle production operations. When questioned by attorney Randall Baron, he was unable to say exactly which part of SolarCity’s staff transferred to Model 3 production efforts and confirmed that the move was not mentioned in the Tesla annual report.

Tesla did not respond to a request for comment on the upcoming lawsuit, although in its most recent annual report, “we believe the allegations challenging the SolarCity acquisition are baseless and intend to defend ourselves. vigorously against them “.

Baron, the lawyer for San Diego-based Robbins Geller Rudman & Dowd, who is leading the case against Musk on behalf of the investors, also declined to comment on the lawsuit.

SolarCity never installed a unique solar panel technology, but instead relied on the installation of conventional product panels from the best manufacturers. Its business was based on installing them, securing rents from customers and monetizing the value of the energy generated by all the systems it installed.

The solar roof program that Musk hoped to replace SolarCity’s conventional panel business was developed through Tesla’s own R&D efforts. Five years later, it is yet to come close to the mass scale Musk hinted at in 2016. This is in part because the company has since learned that, unlike cars that can be produced in series, each roof is different. and must be custom designed. More recently, Tesla said it was only focusing on installing solar roofs for new construction, moving away from the much larger market for renovating existing homes.

“The acquisition of SolarCity was a deal to forget for Tesla investors”

Dan Ives, Wedbush Analyst

As part of the SolarCity acquisition, Tesla also inherited a large-scale solar panel plant in Buffalo, New York. The company has pledged that the facility’s output will increase to 1 gigawatt per year of solar output, in partnership with its long-time industrial partner Panasonic, the leading supplier of lithium-ion battery cells throughout the history of the society. Panasonic scrapped the project last year, and it’s unclear how many solar panels or tiles Tesla is currently producing at the plant. Tesla does not include details of this production in SEC records.

Despite all the headlines and attention Musk and Tesla receive, companies such as Sunrun, now the largest installer of residential solar power systems in the United States, Sunnova and SunPower are bigger players in their industry.

“The acquisition of SolarCity was a deal to forget for Tesla investors because it is a crowded space with minimal traction since the acquisition,” said Wedbush analyst Dan Ives. “The Street assigns a minimum value until they really reach scale and run on the larger vision.”


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