SolarCity Signs $2.6B Merger Deal with Tesla; Shares Tank

Tesla SolarCity merger

SolarCity (NASDAQ:SCTY) signed a $2.6 billion all-stock merger agreement with Tesla Motors (NASDAQ:TSLA). The combination of the companies would create the only vertically integrated sustainable energy company around the world.

Tesla SolarCity merger

Tesla offered to acquire the solar energy company last month, which was considered questionable by CtW Investment Group, a shareholder of the electric car manufacturer. The investment group emphasized that Tesla has governance deficiencies that needs to be addressed before finalizing its transaction with SolarCity.  Some of the Board Members of both companies recuse themselves in the decision process.

The stock holders of SolarCity and Tesla need to approve the merger agreement during a special meeting, which will be held on the dates to be announced by both companies.  Additionally, the transaction is subject to regulatory and customary closing conditions.

SolarCity has 45 days to solicit alternative proposals

Under the merger agreement, SolarCity has 45 days to “go shop,” which means it can solicit discuss, and negotiate alternative proposals from third parties during that period.  After the go shop period, the solar energy company will be subject to customary no shop restrictions except for bids determined by its Board of Directors as superior proposals.

The merger agreement contains certain termination rights for SolarCity and Tesla in the event it is not consummated on or before April 31, 2017. Both companies will be required to pay a termination fee in certain circumstances.

SolarCity will be required to pay a termination fee of $78.2 million to be able to enter into an agreement with a third party that has an alternative acquisition proposal.

The termination fee will be $26.1 million if the solar energy company will enter into a binding agreement with a third party that made an alternative proposal before the expiration of the go shop period

On the other hand, Tesla will be required to pay a termination fee of $78.2 million to SolarCity if its Board of Directors changes its recommendations in the merger agreement prompting the solar energy company to terminate the deal.

A big step for Elon Musk to achieve his master plan

Market observers believe that the merger between Tesla and SolarCity is a big step for Tesla CEO Elon Musk to achieve his master plan for both companies over the next ten years. Musk is also the Chairman of SolarCity.

Tesla, SolarCity Chairman Elon Musk

“Solar and storage are at their best when they’re combined… By joining forces, we can operate more efficiently and fully integrate our products, while providing customers with an aesthetically beautiful and simple one-stop solar +storage experience: one installation, one service contract, one phone app,” according to the companies in a joint blog post.

The stock price of SolarCity declined 7.42% to $24.72 per share while Tesla tanked 2.04% to $230.01 per share on Monday.

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