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Why Does Tesla Want to Acquire SolarCity?

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Tesla’s energy storage business

Tesla’s (TSLA) energy storage solutions business mainly include its Powerwall and Powerpack products. The Powerpack system scales to the space, power, and energy requirements of any site from small commercial businesses to regional utilities. Powerwall products cater to residential customers’ energy storage needs.

SolarCity uses Tesla’s Powerwall in its energy storage integration business. Apart from SolarCity, Sunrun also uses Tesla’s Powerwall batteries in its product offerings. Clearly, downstream solar companies act as feed points for Tesla’s energy storage products. With the acquisition of SolarCity, Tesla aims to sell an electric car, a home battery, and a solar system in a bundle to its customers. However, the probability is debatable.

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Expected synergies

If completed, Tesla expects that its combination with SolarCity would provide the following benefits to its shareholders:

  • Tesla would be the world’s only vertically integrated clean energy company offering end-to-end clean energy products to its customers.
  • It would expand the addressable market more than either company could do separately.
  • It would create the ability to maximize and build on the core competencies of each company. SolarCity could gain from Tesla’s experience in design, engineering, and manufacturing to advance solar panel technology. SolarCity’s wide network of sales and distribution channels and expertise in offering customer-friendly financing products are expected to benefit Tesla and its customers.

Advantage SolarCity

In April 2015, SolarCity (SCTY) announced a residential battery backup service, DemandLogic. It uses Tesla’s Powerwall. SolarCity’s DemandLogic smart energy storage system helps customers reduce energy costs by using stored electricity generated by solar energy systems to bring down peak demand charges.

With the changing regulatory regime of the net metering mechanism across operating geographies, energy backup services are important for the growth of downstream solar (TAN) companies like SolarCity, Sunrun (RUN), and Vivint Solar (VSLR). Therefore, the acquisition could have cost synergies and improve operating margins over the long term. It could also bring down SolarCity’s cost of capital.

Next, we’ll look at SolarCity’s enterprise value and liquidity position.

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