It was February when Elon Musk suggested to his cousin that they merge the companies they run, Tesla Motors Inc. and SolarCity Corp.--three months before the electric-car maker sold $1.4 billion in stock in a secondary offering and four months before Musk made a marriage proposal public.
Musk, Tesla’s chief executive officer and SolarCity’s chairman and largest shareholder, had the discussion with his cousin, SolarCity CEO Lyndon Rive, sometime before Feb. 29 when Tesla’s board was briefed on the idea, which it turned down at the time, according to a document filed Wednesday with the Securities and Exchange Commission.
That means that Musk and Tesla’s board had considered a merger with SolarCity before its May stock offering without disclosing it to potential buyers of the new shares. The merger has been controversial among Tesla shareholders, some of whom have opposed the deal and sold the stock when it was announced in June. Tesla shares fell more than 10% on June 22, the first trading day after the merger proposal was announced. The company declined to comment beyond the filing.
Some shareholders and analysts have questioned the deal because Musk owns more than 20% of each company. SolarCity has struggled financially and some analysts have said that its cash burn could be a problem for Tesla, which also needs money to develop new cars like the Model 3 sedan, which is supposed to begin full production in mid-2017. Tesla in the filing reiterated plans to raise more capital this year.
Musk has expressed interest in solar energy as part of Tesla’s vision in the past. His 2006 master plan for the carmaker said it aimed to “expedite the world’s move from a mine-and-burn hydrocarbon economy towards a solar electric economy.” It also included plans to co-market solar panels from SolarCity.
The February discussion between Musk and Lyndon Rive was described in documents as “high-level, conceptual,” with the two CEOs talking about possible product offerings from the combined company. The filing doesn’t specify if the conversation was before or after Musk’s Feb. 12 purchase of almost 570,000 shares of SolarCity for an average price of about $17.56 apiece, which brought his holdings to about 21.8 million shares.
The idea got more serious at the special meeting of Tesla’s board on Feb. 29, when Wheeler presented to directors “preliminary considerations related to product and operational synergies” that could come from a merger, which directors put off at the time.
Tesla’s board took the possible deal more seriously on May 31--just 13 days after the secondary stock offering was announced--when it directed management to assess a potential solar acquisition. The board requested “the strategic rationale of an acquisition of SolarCity or other potential acquisition targets in the solar-energy industry” as well as a financial analysis of such a deal.
In the same meeting, the board told management to use law firm Wachtell,Lipton, Rosen & Katz as special outside counsel for legal analysis relating to a potential transaction. Evercore Partners was brought in as a financial adviser.
The documents also show that SolarCity had two inquiries from two possible partners in June, but neither of the unnamed parties made an offer.