Elon Musk makes a mistake

Alex Pollak

Loftus Peak

And his stock will open down 10% tonight in the US just to make sure he knows it. Musk’s Tesla contracted to buy Solar City last night in a deal worth US$2.8b for the equity but which will also mean the assumption of a chunk of debt which may be quite a bit larger than that. The commentariat will make much of the fact that Musk and Tesla have a conflict of interest because a co-founder of SolarCity is Musk’s cousin, Lyndon Rive, while Musk is chairman of both companies. If this deal made sense, shouldn’t Exxon own GM? Conflicts will be an issue, but one that will be dealt with by the various boards, auditors and assorted governance bodies, who will no doubt sign off. The real problem is the numbers. Tesla is a US$30b company (before off-balance sheet liabilities, which may or may not include a US$5b battery factory in Nevada) so outlaying/shouldering SolarCity's US$5b of incremental liabilities is not trivial. Especially against a backdrop of the very significant working capital requirement that Tesla is up against. (VIEW LINK)

Alex Pollak
Loftus Peak

CIO of Loftus Peak, a specialist global fund manager with a track record of successful investment in some of the world's fastest-growing listed businesses.

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