Tesla's SolarCity bid adds debt, sucks cash from carmaker at sensitive time

By Alexandria Sage and Paul Lienert

SAN FRANCISCO/DETROIT (Reuters) - Elon Musk may have "zero doubt" over the common sense of Tesla Motors' proposed acquisition of rooftop solar company SolarCity, but a merger of the two cash-burning companies at a crucial time in the electric car firm's growth plan carries financial risk Tesla can ill afford, investors and analysts say.

The proposed stock deal, worth $2.8 billion (1.91 billion pounds) at Tuesday's close, effectively doubles long-term debt on Tesla's (TSLA.O) balance sheet and exacerbates persistent cash burn that already pushed Tesla to the markets last month for a $1.7 billion capital increase.

Tesla, which appeared set for the rest of the year, might have to come back to the markets sooner in order to fund SolarCity (SCTY.O) and production of Tesla's Model 3, a roughly $35,000 vehicle due in 2017 on which the company has pinned its future.

Analysts say the potential synergies involved in bundling purchases of solar panels, home energy storage and electric vehicles do not appear to justify $2.64 billion in new debt on Tesla's books from SolarCity and the solar panel company's cash needs. Pacific Crest Securities calculated Solar City will require $400 million in cash for operations next year.

Both companies have promised investors they will see positive cash flow by year's end, but Tesla has yet to prove it can build cars at high volume "while generating a profit or positive cash flow," wrote Morgan Stanley's Stephen Byrd, who rates Telsa a "buy."

Together, the two companies - which have consistently posted either operating or net losses - posted a combined net loss of $1.66 billion in 2015 with a combined negative $4.79 billion in free cash flow. Tesla's chief financial officer has vowed to trim costs, proclaiming in February that "cash is king."

One question is whether Tesla Chief Executive Musk had been contemplating the SolarCity deal when he took to the markets for fresh capital last month. That was pitched as funding for the 2017 launch of its Model 3 electric sedan on an accelerated production schedule that will require a factory rebuild and substantial hiring. Tesla did not immediately respond to a question about this.

Before the capital raise, Tesla estimated $2.25 billion in capital investments needed in 2016 mostly for the Model 3. As of March 31, it had $1.44 billion in cash and cash equivalents, before the capital increase in May.

Musk said SolarCity would post positive cash flow in the next three to six months and would not have a material impact on Tesla's future cash needs or its expectation to be cash-flow positive by year-end. Cash burn would decline after the deal is done, Musk said.

Those statements did not appear to convince analysts, both bull and bears alike. UBS, which rates Tesla shares a "sell," said SolarCity's upfront capital needs to grow its business would "likely (increase) overall cash burn for Tesla."

Analysts generally believed Tesla had enough cash to last the year and to make initial investment in tools and equipment to build the Model 3. The SolarCity deal may carry that forward, said Barclay analyst Brian Johnson, who rates shares "sell."

"In funding SolarCity's losses, it further reinforces our view Tesla will need to return to the capital markets for additional capital infusions," wrote Johnson.

"However, this is contingent on the equity capital market remaining an open well for Tesla – which is far from certain."

(Writing by Alexandria Sage; Editing by Peter Henderson and Alan Crosby)