Elon Musk’s two major enterprises, Tesla Motors and solar panel provider SolarCity, are facing potentially fatal headwinds, the electric vehicle maker announced in a securities filing Wednesday.
Tesla disclosed in the filing that it must pay nearly half-a-billion dollars ($422 million) to its bondholders in the third quarter — the filing also admitted that it must raise even more money by the end of the year.
The purpose for the capital infusion is to prop up the merger between Tesla and SolarCity. Musk is the chairman of both companies and owns approximately 20 percent of each.
The filing also showed that the merger is quickly turning into a toxic hot potato among investors.
Tesla’s filing admitted that 15 tech investors passed on either purchasing SolarCity or shoveling cash into the bloated solar panel maker. Investors are running away from the merger in droves, leaving Musk’s entities facing a massive liquidity squeeze, the filing indicated.
SolarCity’s on-hand cash has tumbled from $421 million in 2015 to $146 million on June 30, the company revealed.
Critics blasted the proposal to merge the two companies, especially after it was revealed that six of seven members of SolarCity’s board of directors are intimately linked to Musk.
Musk and his cousins, Lyndon Rive and Peter Rive, for instance are purchasing $100 million bonds of beleaguered solar panel company SolarCity.
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 acquiring $17.5 million, the company said in financial filing in August.
Kimbal Musk, Elon Musk’s brother, is a director on the Tesla Motors Board of Directors, and had not recused himself from the voting process at the time, despite the long history he and his brother have building Internet-based companies.
SolarCity’s advisers requested Tesla “consider providing SolarCity with short-term financing” prior to the bond deal being announced, according to Wednesday’s filing. Musk decided to buy the bonds instead.
“SolarCity needs emergency funds to keep operating, and without the debt they issued to insiders they wouldn’t be able to cover their working capital,” Gordon Johnson, a managing director at Axiom Capital Management Inc., told reporters.
Analysts meanwhile are highly skeptical of Musk and his cousins’ decision to purchase the unsecured SolarCity bonds.
The possibility that a director of a publicly traded company would buy debt is highly unusual, and raised 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 Group owns more than 200,000 shares of Tesla.
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