By Paul Lienert and Liana B. Baker
(Reuters) - SolarCity Corp <SCTY.O> agreed to Tesla Motors Inc's <TSLA.O> $2.6 billion offer to buy the solar panel installer, the companies said on Monday, clearing one obstacle in the way of Elon Musk's ambitious plans for a carbon-free energy and transportation company.
Tesla's offer represented about half of SolarCity's value a year ago, a tumble reflecting the solar company's slowing growth, complex financial structure and the increased scrutiny of government incentives for rooftop solar.
For Tesla, acquiring SolarCity offers the promise of greater economies of scale in electrical energy management systems, battery production and marketing, tempered by the near-term challenge of managing a high-risk ramp-up of vehicle production and a merger simultaneously.
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Standard & Poors said Monday it put Tesla's credit ratings on CreditWatch with negative implications "to reflect the significant risks related to the sustainability of the company's capital structure following the proposed transaction."
Tesla's stock swap offer valued SolarCity at $25.37 a share, or $200 million less than the initial proposal Musk outlined in June, before advisers to the companies had done due diligence.
SolarCity shares shed 7.4 per cent on Monday to close at $24.72, a level that suggests most shareholders are betting the deal will be approved. Tesla shares closed down 2 percent at $230.01.
The company on Monday cut its forecast for full-year installations by 10 percent from prior guidance. In 2017, SolarCity said it expects improvement driven by integrated battery storage offerings and "a new solar product focused on the 5 million new roofs installed each year in the U.S."
SolarCity has come under pressure from rivals offering low-cost solar energy from large, utility-scale installations, and because some state governments have reined in subsidies that encouraged rooftop solar.
"SolarCity's cost of capital is higher than the individual in most cases," Musk said on a call Monday, adding SolarCity could focus on selling systems to homeowners, financed through their mortgages.
Tesla shares also dipped, as Musk repeated that if the deal is consummated, the combined Tesla-SolarCity could require a "small equity capital raise" next year. Until Friday's close, Tesla shares were up 7 percent since the company first announced its proposal. Tesla said in a regulatory filing it would issue shares as part of the transaction.
Musk, chairman of both Tesla and SolarCity, said a capital increase could be a "low to mid single digit" percentage of Tesla's market capitalization, which on Monday was about $34 billion.
Both companies have been burning through cash, although they have projected achieving positive cash flow later this year. SolarCity Chief Executive Officer Lyndon Rive, who is Musk's cousin, repeated that forecast during a conference call on Monday.
Musk last week said it could ultimately cost Tesla "tens of billions" of dollars over several years to develop a pickup truck, a semi truck and a "spacebus" people hauler as outlined in his new strategic plan for the automaker.
Some analysts are skeptical that combining Tesla and SolarCity will yield a quick turnaround.
"When two highly leveraged companies that have to raise huge amounts of capital merge, you don't get a stronger company. You get a larger company that combines the weaknesses of both smaller companies," said Erik Gordon, professor at the University of Michigan Ross School of Business.
Analysts who follow SolarCity expressed more upbeat outlooks. JP Morgan called the offer "attractive," saying it would give "capital-hungry SCTY better access to wholesale capital markets via its acquirer’s balance sheet.''
Tesla has enjoyed strong demand for its stock, and raised about $1.7 billion with a share sale in May.
Musk said the plan to consolidate two clean energy businesses in which he has large stakes will remove barriers to growth between companies he always intended to function as one.
Musk and Tesla Chief Financial Officer Jason Wheeler said the companies could save at least $150 million a year by combining sales forces, and sending one truck to a home to install solar panels, a Tesla energy storage system and a recharging system for a Tesla car. Now, as many as three trucks and technicians might go.
Musk said a combined SolarCity and Tesla should be able to spend less on manufacturing and capital investments than they would have separately, and will be able to negotiate deals with utility companies more quickly.
Musk said Tesla and SolarCity are already working on consolidating and sharing key technologies, such as electronic power controls. "If it doesn't go through, it will be awkward," he said.
Delivering on those promises will add to Tesla's ambitious agenda. Over the next two years, the luxury electric carmaker plans to increase vehicle production roughly fivefold at its Fremont, California, assembly plant as it starts making the Model 3 sedan and related vehicles.
Tesla later this year plans to start production of car batteries at its Gigafactory near Reno, Nevada. Tesla and partner Panasonic Corp <6752.T> have begun installing complex, automated battery manufacturing equipment in parts of the plant as construction continues. Musk has said the Gigafactory ultimately will have solar power systems on its roof.
Musk is the largest shareholder in both companies, and if the transaction goes through could increase his stake in Tesla from about 21 per cent to 23.4 percent, including the conversion of his current stake in SolarCity.
His cousins Lyndon Rive and Peter Rive are co-founders of SolarCity. The companies share board members and major shareholders. SolarCity formed a special committee to evaluate the Tesla offer, and Musk said he had no say in the final acquisition price.
Final approval of the deal will depend on independent shareholders. The deal includes an unusually long "go-shop" provision that allows SolarCity to solicit offers from other potential buyers for 45 days through Sept. 14.
Musk and sources familiar with the situation have said they are confident the deal will win needed support.
Daniel Marcus, principal of Marcus Capital LLC, a Chicago investment adviser which owned 22,100 Tesla shares at the end of June, said he supports the takeover bid and Musk’s long-range plan.
“If some people see things three steps ahead, Elon Musk is 10 steps ahead,” Marcus said.
Musk has wooed larger shareholders, including managers at Fidelity Investments whose funds are among the biggest owners of both SolarCity and Tesla stock, outside of Musk.
SolarCity was a Wall Street darling following its 2012 initial public offering thanks to supercharged growth of its no-money-down rooftop solar offerings. SolarCity said late last year it would grow more slowly and focus on generating cash and cutting costs. The company's shares hit $81 in early 2014.
The company's outlook has darkened as government policies that underpinned the rooftop solar sector's expansion in recent years face increased scrutiny in many U.S. states.
(Reporting by Swetha Gopinath in Bengaluru, Liana Baker in New York, Paul Lienert in Detroit and Nichola Groom in Los Angeles.; Editing by Joseph White and Jeffrey Benkoe)