While corporate governance, compliance and fund reporting drive the valuation process for portfolio investments, sometimes transaction-related opinions are required in the form of fairness and solvency opinions. Both opinions require significant valuation and financial analysis, but such opinions also incorporate an examination of the process followed, case law, statutory law and the like as part of the analysis.
Because he provides so much fodder for business, economic, social, and political pundits, it is not surprising to us that an examination of Elon Musk’s two biggest transactions — the acquisition of SolarCity by Tesla and Twitter by X Holdings — provides useful insights for parties that are contemplating a major transaction that require a fairness or solvency opinion. These insights apply to private equity and private credit funds, too — especially regarding real and perceived conflicts of interest.
Fairness of the Telsa-Solar City Merger
On July 31, 2016, the Board of Directors of Tesla Motors, Inc, and SolarCity Corporation entered into a merger agreement in which Tesla would acquire SolarCity via a share exchange (“Acquisition”) that valued SolarCity at $2.6 billion and would result in SolarCity owning about 6.9% of Tesla’s common shares upon consummation of the Acquisition.
Musk served as non-executive chairman of SolarCity since July 2006, and at the time of the merger served as CEO and Chairman of Tesla. He owned ~22% of Tesla’s common shares and ~22% of SolarCity’s common shares. Tesla Director Anthony Gracias served on the SolarCity Board, too. Excluding Musk, the SolarCity Board owned about 13% of SolarCity’s shares of which ~8% was attributable to cousins Peter and Lyndon Rive. The Tesla Board owned less than 1% of Tesla’s shares excluding Musk although three institutional shareholders collectively owned ~20% of the shares.
Not surprisingly, some Telsa shareholders sued alleging Musk browbeat the board into a deal to bailout SolarCity which incinerated cash. Our presentation provides a background on the merger, financial performance of the companies, relative valuation and other factors that one would expect in a fairness analysis.
Surprising to us and others was the resounding victory Musk won in Delaware’s Court of Chancery in April 2022. Follow this link for a full presentation of the various issues and how Chancellor Sights ruled in favor of Musk.
Solvency of X Holdings Post Twitter
The acquisition of Twitter by Musk has amplified his reach; however, the steep drop in Twitter’s revenues since the acquisition occurred combined with a heavily leveraged purchase has raised the prospect of a bankruptcy filing if Musk cannot turnaround the financial performance and/or if he does not inject additional capital.
The acquisition had plenty of drama (impulse purchase, buyer’s remorse, litigation in Delaware again), but it would never have happened if Musk had not obtained the backing of Morgan Stanley, Bank of America and other banks to secure $13 billion of financing that is now hung on their balance sheets. With Twitter’s finances apparently in tatters, Musk may have the upper hand with the banks.
While the proxy statement provides a roadmap for the deal history, including fairness opinions issued by Twitter’s financial advisors, there is no such disclosure for X Holdings; nor is there any mention of a solvency opinion X Holdings may have obtained as part of its “solvency representation” in the borrowing agreement.
This presentation reviews the transaction from the perspective of issuing a (shadow) solvency opinion.
About Mercer Capital
Mercer Capital is an independent valuation and transaction advisory firm that was founded in 1982. We provide valuation, fairness and solvency opinions for a broad range of clients, including private equity and private credit funds. Please call if we can assist in establishing the fair value of your private equity and credit investments, or alternatively provide assurance opinions.
Originally featured in Mercer Capital's Portfolio Valuation Newsletter: Fall 2023