Elon Musk’s decision to buy $100 million in SolarCity debt is causing tech industry insiders to question the solar company’s business model and Musk’s increasingly bizarre PR tactics.
Musk knows he has to “ride good PR” in order to keep his entire Tesla-SolarCity empire atop the renewable energy market, Matt Stack, the co-founder of Devonshire Research Group (DRG), told The Daily Caller News Foundation.
Musk’s recent decision to purchase staggering amounts of debt from the floundering solar panel provider, while calling the cash infusion an investment, only illustrates Musk’s ability to spin extreme negatives into relative positives, Stack said.
Stack’s investment firm shorted Musk’s electric vehicle company Tesla Motors’ stock in May after issuing a report stating the company’s financial model is a kind of “Ponzi scheme” strikingly similar to the one created by “Enron.”
In fact, SolarCity’s fortunes have “risen and fallen with government grant programs — so if you look at SolarCity, as well as Tesla, you’ll see that they are incredibly reliant on positive news,” Stack said, mostly because of the company’s faulty business model.
Stack was responding to questions about Musk’s decision to purchase $100 million bonds of his solar panel company. Musk also roped his cousins — Lyndon Rive and Peter Rive — into acquiring the some of the company’s debt. The three are also SolarCity directors.
Musk, SolarCity’s chairman and primary stakeholder, bought $65 million of bonds, while Lyndon Rive, the company’s CEO, and Chief Technology Officer Peter Rive (Lyndon’s brother) are each buying up $17.5 million, the company said on Aug. 24 in a financial filing.
Other tech analysts and investors do not hold quite as pessimistic view about Musk or Solar City as Stack, but they are no less worried the purchase is a sign of disaster for the underperforming solar company.
The possibility that a director of a publicly traded company would buy debt is highly unusual, and should raise a lot of red flags for investors as well as the public in general, Charles Elson, an authority on corporate governance at the University of Delaware, told reporters in an interview with CNBC Wednesday. “It is very odd,” Elson added.
“It’s essentially material information that I think the Tesla board has to consider,” Stephen Diamond, an advisor to Tesla investor group CtW, told reporters. He also called the debt buy a “troubling move,” which could ultimately cause people to wonder about the solvency of the company.
CtW Investor Group wanted Tesla to shake up its board of directors in June after it was discovered that six out of seven board members with the solar panel company have direct connections with Musk.
The group said the market’s initial “hostile reaction” to the SolarCity deal was induced, in part, by the fact that Donald Kendall, chief executive of investment management firm Kenmont, is the only person on the SolarCity board without deep-rooted ties to Musk.
Officers of major companies typically don’t buy debt sold by the companies they run, according to Elson. His main concerns are that owning bonds, or considerable debt, does not signal the kind of confidence in an entity as would, say, doubling down on the company’s stock.
If a company goes bankrupt, Elson added, bondholders — even those holding unsecured notes — are usually paid before shareholders. In essence, they are nearly guaranteed their money back in the event the company folds.
“When you see an officer buying stock, it is a good sign — it means the business might have a good future,” he said. “If you see them buying debt, you wonder, what is the long-term value.”
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