Axiom's Johnson Sees Tesla (TSLA) Tapping Equity Market for Another $3B; Lowers SolarCity (SCTY) Target to $14

September 9, 2016 11:05 AM EDT
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(Updated - September 9, 2016 12:20 PM EDT)

Axiom Capital analyst Gordon Johnson was out with a critical report on the Tesla (NASDAQ: TSLA)/SolarCity (NASDAQ: SCTY) merger and sees Tesla issuing another $3 billion in equity over the near-term.

In the report, Johnson said after analyzing the recent S-4 he sees "burgeoning risk" to the deal closing. First, he highlighted that Tesla didn't look at any other solar companies besides SolarCity. After just 3-weeks or less of due diligence into a very complex, heavily indebted company, Evercore declared SolarCity "the most attractive asset for Tesla in the solar energy industry." They did this even though they didn't receive SolarCity's financials until 3 weeks later. Further, he notes that Evercore's terminal growth rate of 3.0%-5.0% for SolarCity DevCo suggests, at some point in the future, it would grow to be larger than the entire US economy. Meanwhile, SolarCity couldn't find anyone willing to top Tesla's offer.

Given this info, the analyst believes Tesla shareholders are incrementally less inclined to vote "yes" for this deal before the current 4/30/17 cutoff date.

He also said he believes Tesla has already provided $175 million in bridge financing to SolarCity, a sign of a beleaguered company.

Johnson also believes the debt market are shutoff for Tesla and sees the electric vehicle maker tapping the equity market with a large $3 billion capital raise.

The firm's risk-adjusted price target on SolarCity moves down to $14 from $18.

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