Elon Musk is set to combine his electric vehicles and energy storage company, Tesla Motors (TSLA 1.33%), with his solar installer, SolarCity (SCTY.DL), in a major move to create a vertically integrated energy company. The deal isn't done yet, but as the largest shareholder in both companies Musk has a lot riding on getting it done.
There are some downsides to the deal though, especially on the solar side of the business where SolarCity has struggled for most of the past year. Here are some companies who could be winners if Tesla does end up buying SolarCity.
The residential solar industry is reliant on constant funding for solar systems, which SolarCity and Vivint Solar (VSLR) both keep on their balance sheets. Market confidence is key to keep those funds flowing.
We've already seen SolarCity's borrowing costs rise this year as investors question the level of risk solar leases present. But that may be the least of the company's problems. When SunEdison agreed to buy out Vivint Solar, financial markets closed up quickly and it saw borrowing costs soar to over 10% annually, a rate that would crush SolarCity's ability to sell leases. And given the complexity and risks a Tesla Motors/SolarCity merger would pose, markets may ask for higher rates on SolarCity debt.
There's also the inherent distractions operating as a larger company, as would be the case were TSLA and SCTY to merge. We saw that happen at Vivint Solar in 2015 when fourth quarter installations grew just 17%, compared to 191% a year earlier. Taking your eye off the ball in solar, even for a second, can be bad given the need to keep new customers flowing into the system.
If financing locks up or SolarCity gets distracted, that would create a big opening for Vivint Solar. Now independent of SunEdison's merger deal, it's the second largest residential solar installer in the country and the only national company with costs that come close to SolarCity's.
When talking about merging with SolarCity, Elon Musk talked a lot about a more complete solar offering, bolstered by high efficiency solar panels from SolarCity's upcoming Silevo manufacturing plant. One company that already has higher efficiency than SolarCity will have from that plant is SunPower (SPWR -3.31%).
SunPower's high efficiency solar panels have been the core of its product offering for a decade and the industry is just starting to realize some of the benefits of that efficiency. The company has made integrated product offerings in residential, commercial, and utility scale projects that make an elegant solution that's gaining market share. SunPower also sells 70% of its residential systems for cash or with loans, so it's less reliant of financial markets to stay afloat.
SunPower has already said that it will gain market share in 2016 as customers move to higher efficiency products and loan offerings and any weakness in SolarCity could help it gain even more share.
On the commercial and utility side, SolarCity has been trying to grow its business with mixed results. It's had more delays and higher costs than expected and I don't see how being acquired by Tesla Motors would help that in any way. One thing to consider in both commercial and utility solar is that SolarCity/Tesla Motors may not be as desirable a counterparty for business owners and utilities as a company like SunPower. You don't want your counterparty going out of business and companies will likely be wary of that after SunEdison's bankruptcy. SolarCity and Tesla Motors are both losing money and that may make them weaker competitors in this larger scale solar industry.
A new world in residential solar
The residential solar industry is changing rapidly with companies trying to add capabilities to make their systems cheaper and smarter for homeowners. It's that vision that Elon Musk sees as an advantage in merging SolarCity and Tesla Motors.
But a more vertically integrated company brings risks with it as well. And if SolarCity can't execute flawlessly it'll leave an opening for companies like Vivint Solar and SunPower. They could be the real winners of this merger in the long run.