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Over the weekend, SolarCity Corp (SCTY.DL) agreed to be bought out for a price that today would pay investors 60% less than the 52-week high shares have traded at and 72% below its all-time high. A company selling out for that low a price must see some real challenges it can't solve on its own, or why sell at all?
Most startling is the co-founders Lyndon Rive and Peter Rive are giving up hundreds of millions in potential income if SolarCity did recover. And that alone may tell us a lot about how they view the company's future.
Musk wipes out cousin's big payday
When Tesla Motors (TSLA 12.06%) made its official offer to buy SolarCity, it included details about how employees would be compensated for their existing stock options and restricted stock units. The filing states the conversion this way:
SolarCity options and restricted stock unit awards will be converted into corresponding equity awards in respect of Tesla common stock based on the Exchange Ratio, with the awards retaining the same vesting and other terms and conditions as in effect immediately prior to consummation of the Merger.
What was notable is that the proposed merger wiped out $77 million and $51.4 million in performance based stock options awarded to Lyndon Rive and Peter Rive just last fall. The Founder Awards, as they were called, had an exercise price of $48.97 per share and a vesting schedule based on performance and stock price goals. And just a few months later they're now worthless.
Why agree to a deal at all?
Elon Musk may be the public face of Tesla Motors and SolarCity, but Lyndon Rive is the CEO and Peter Rive is the CTO. They run SoarCity and if they thought the company could have doubled in value, or more, in the next decade they had plenty of financial incentive to oppose the deal.
That's what makes the deal so puzzling if you're a believer in SolarCity. In theory, the company is already trading at a discount to its retained value, so why wouldn't management bet that the stock can more than double over the next decade.
Does management see more trouble than they let on?
I've been arguing for months (see here, here, and here) that SolarCity is going to struggle to adapt to customers demanding rooftop solar with loan financing at low costs because its lease/PPA focused business model simply can't make the shift. And if you look at Monday's lowered guidance, on top of missing estimates the previous two quarter, you can see that SolarCity is already struggling in today's solar market.
As regional solar installers gain market share and loans become more available, maybe Lyndon Rive and Peter Rive see the writing on the wall that SolarCity is in real trouble. Why else would they give up the potential for tens, if not hundreds of millions of dollars in stock option value if SolarCity's stock recovers?
The easy answer is that they don't see a recovery ahead. And that should tell you a lot about why SolarCity is willing to sell at a highly reduced price versus where it traded at a year ago. The future must not look bright, even from SolarCity's C-Suite offices.
