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Tesla share price drops after investors urge Musk to repay $13bn from SolarCity deal

Tesla [TSLA] shares continue to tumble after a lawsuit from shareholders alleged that founder Elon Musk ‘strong-armed’ the board into approving the acquisition of SolarCity in 2016.

The investors will find out in three months whether they have been successful in forcing Musk to repay $13bn over the group’s deal for cash-strapped SolarCity.

Union pension funds, asset managers and other Tesla shareholders say the deal was a needless distraction and burdened the EV maker with SolarCity’s financial problems and debt.

Tesla shares have tumbled since the hearing

The Tesla share price, which is also under pressure from the wider selloff in tech shares due to fears of interest rate hikes, fell 3% the day after the hearing on 18 January ended and has dropped a further 10.4% since then.

Investors are concerned about further impact on the Tesla share price if Musk is forced to pay back the $13bn, which could mean that he sells off some of his Tesla holding to cover the bill.

Last November Musk ran a Twitter poll stating that he would offload 10% of his stake in the group if users of the network gave the go-ahead. They duly did and Musk sold $5bn worth of stock. The Tesla share price fell 13% over the period between the announcement of the poll and the first sale. 

If Musk sold off double that to help pay a $13bn award, Tesla stock could fall even further.

The Tesla share price is already under pressure because of the company’s high valuation of nearly $1trn and the turn away from growth to value stocks. The Tesla share price has fallen 12.6% this year, despite a positive fourth-quarter update beating expectations on revenues, earnings per share and vehicle delivery numbers.

However, Musk stated that the group will remain ‘chip limited’ given the current and long-lasting semiconductor supply shortage, which means no new models this year.

Was the SolarCity deal a bailout?

Vice chancellor Joseph Slights of Delaware’s Court of Chancery said he would make his ruling on Tesla’s case in the next three months, after closing arguments in January.

The all-stock SolarCity acquisition was valued at $2.6bn in 2016, but since that time Tesla's stock has soared. The shareholders want to order Musk to return the stock he received, which is worth around $13bn at the current Tesla share price.

“This case has always been about whether the acquisition of SolarCity was a rescue from financial distress — a bailout — orchestrated by Elon Musk,” Randy Baron, an attorney for shareholders, said at the hearing, reported Reuters.

Musk has said that it was part of a long-term plan to combine SolarCity’s solar power generation with Tesla’s cars and batteries, reported Reuters.

Musk’s lawyers told the court that the deal was not a bailout as SolarCity was not insolvent and its finances resembled those of high-growth tech companies. They said that returning stock would be “preposterous” and would ignore five years of unprecedented success at Tesla.

Musk’s lawyers say he had no power

According to Musk’s lawyers, the Tesla founder had no power to fire directors or control their pay and had recused himself from price negotiations during the SolarCity deal.

“Tesla acquired SolarCity at a fair price following a fair process, and Mr Musk did not control the board who unanimously approved this transaction or the shareholders who overwhelmingly voted in favour of it,” Evan Chesler, an attorney for Musk, said.

“Tesla acquired SolarCity at a fair price following a fair process, and Mr Musk did not control the board who unanimously approved this transaction or the shareholders who overwhelmingly voted in favour of it” - Musk attorney Evan Chesler

 

Another Musk attorney, Vanessa Lavely, added: “Without Elon Musk, Tesla might not exist let alone have a $1trn value. That doesn't make him a controller. That makes him a highly effective CEO.”

Despite this, Musk’s fellow Tesla directors agreed to a $60m settlement of shareholder claims early in 2020.

Musk has remained steadfast, stating that an award would be a “windfall” for the shareholders.

Analysts are still bullish on Tesla stocks

Despite the controversy, the Tesla share price fundamentals still look strong. Tesla stocks have been boosted by robust EV infrastructure spending plans announced by the US government and other nations striving to hit net-zero carbon emissions goals.

Tesla’s huge production capacity both in the US, China and Germany also give it an advantage over other EV makers. It has a strong brand recognition among consumers looking to turn green, and this is likely to continue.

According to Market Screener, Tesla has a consensus ‘outperform’ rating among analysts and an average target price of $965, compared with the current Tesla stock price of $923.32 on 4 February.

Jefferies has a $1,400 target on the Tesla share price, with analyst Philippe Houchois liking its strong free cash flow, operating metrics and global growth hopes.

Despite the short-term impact of the SolarCity case, expect the Tesla share price to keep shining.

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