August 3, 2016

It’s not a great surprise, but SolarCity Corp has officially accepted Tesla Motors Inc.’s $2.6 billion buyout offer. That’s less than half the solar panel company’s value last year, so it looks to be yet another clever bit of business by Elon Musk.

This has almost certainly been the end goal for some time and with SolarCity added to the Tesla portfolio, Elon Musk can realise his dream of providing clean energy that powers your home and car.

The official line is that it offers Tesla better economies of scale in terms of marketing, R&D with the batteries and even installation. But this has clearly been the plan for a long time and Tesla’s Gigafactory in Reno, Nevada, now looks like a potent weapon to take the fight that is undoubtedly on the horizon with the traditional energy suppliers.

Short term pain for long term gain

In the short-term, Tesla has taken on a world of trouble, though, as it attempts to combine this complex merger with a rapid increase in vehicle production. The Model 3 is just going on sale and that is the volume seller, the Model S is still a work in progress and Musk has promised a pick-up truck, a bus, a heavy rig and more in the near future.

Standard & Poor’s has put Tesla’s credit rating on CreditWatch with a negative marker to reflect the serious risk that Musk is taking with Tesla’s future. He had to endure watching 2% wiped off the value of Tesla, too, at a time when the company is going forward like never before.

As with all mergers, it’s a complex deal that involves a stock swap offer and the deal values SolarCity at $25.37 a share. That’s significantly less than the initial offer and it actually suggests that SolarCity is worth half the amount it was last year.

In part this is due to a slowdown in growth in the solar panel industry. Government incentives are now harder to access, SolarCity itself has a convoluted financial structure and it faces increasing competition from cut-price competition.

The killer competitive advantage is the integration

Musk reckons he can take a much larger slice of the 5 million solar roofs that are installed each and every year, though, and linking the service with a Powerwall battery and a battery-powered car is a massive competitive advantage.

That will manifest in terms of reduced installation costs for each unit and lease deals that incorporate all three aspects. Pricing obviously hasn’t come up yet, but this amount of buying power and its own battery factory means Tesla is in a strong position.

Some capital gains might be necessary

Tesla may need to raise capital next year, according to Musk, if the deal goes through as expected. He expects it to be a ‘low to mid single digit’ percentage of the company’s actual market capitalization. This week, that was approximately $34 billion and if Musk can force this deal through then it could well be a landmark moment for Tesla Motors, the Powerwall battery and SolarCity.

Read next: 5 major takeaways from Tesla’s Master Plan: Part Deux

As Musk’s cousin, Lyndon Rive, is the CEO of SolarCity and the solar panel manufacturer needs the Powerwall just as much as Tesla needs the panels, we expect this deal to get the rubber stamp very soon.

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