Acquisition Talks Boost SolarCity;Hit Tesla: ETFs In Focus

With the target of establishing itself as the ultimate destination of clean energy, Tesla Motors Inc (NASDAQ:TSLA) made a bid to purchase solar panel installation firm SolarCity Corp. (NASDAQ:SCTY) in a stock deal valued about $2.8 billion.

Interestingly, after the offer was made, Tesla stock proved to be a loser, having shed over 12% after hours on June 21, 2016 while SolarCity shares surged over 14.7%. As per Reuters, Tesla shares lost over $4 billion in value, higher than the bid value of the acquisition.

Why is it Apparently an Obvious Deal?

Elon Musk, who is the chairman of SolarCity, CEO of Tesla and the top shareholder of both companies (as noted by Reuters) views this as a “no brainer” deal. This is because he wants an all-in-one destination where an electric car, a home battery and a solar system will be up for sale.

In short, he seeks to combine all the divisions, right from a charger to power this battery-driven car to the source of solar energy. Tesla management believes the deal is a win-win for both companies and a mean to broaden their reach. It is yet to be disclosed when shareholders can vote on the agreement, as the deal is waiting due diligence.

Brainstorming Stock Performance of a ‘No-Brainer’ Deal?

The stock performance was a bit expected. After all, solar stocks including SolarCity are not faring well lately. SolarCity reported wider-than-expected loss for the first quarter and cut its outlook for solar panel installations this year. In the last one month (as of June 21, 2016), SCTY shares lost about 11.9% while Tesla’s performance was decent (up 1.6%), if not great (read: 5 ETFs to Ride High on Tesla Q1 Strength).

Many are probably viewing this deal as a relatively-winning company capturing a losing one and believe that the loser will benefit greatly while the erstwhile winner will lose status. One analyst feels “it could financially strain Tesla” despite the fact that the car maker itself is not healthy on cash. SolarCity’s cash position is even more miserable, spending around $6 for each dollar of sales, per Wall Street Journal (read: Solar ETFs Lose Their Shine on Weak Earnings).

There is yet another view among analysts that with this prospective deal, Tesla is losing its focus. So far this year (as of June 20, 2016), Tesla is down 8.5% while SCTY has plunged as much as 58.5%.

Is the Deal Timely?

We believe SolarCity’s present low share price helped Tesla to end up in an overall deal value within $2.6−$2.8 billion. This represents a premium of 25–35% to the SolarCity’s current share prices. Had SolarCity been a highflying stock, Tesla would have had to pay way more than $2.8 billion for this acquisition. From that perspective, the deal seems timely.

ETFs to Consider

Needless to say, such a big event – and highlighted price performances – will invariably put ETFs heavy on Tesla and SolarCity in focus. Investors interested to take position on the basis of this Tesla-SolarCity deal could consider the ETFs mentioned below. These products could see elevated trading volumes ahead.

Market Vectors Global Alternative Energy ETF (NYSE:XLE) ( (HN:GEX) )

This ETF tracks the Ardour Global Index, focusing on global companies that are primarily engaged in the business of alternative energy. Tesla Motors occupies the third position in the basket with a 9.92% allocation. SolarCity has 2.14% weight in the fund (see: all the Alternative Energy ETFs here).

First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)

This fund tracks the Nasdaq Clean Edge Green Energy Index. In total, the product holds 41 U.S. securities in its basket with Tesla Motors taking the second spot at 8% while SolarCity takes the eleventh spot with 3.53% share (read: Democrats Likely to Win 2016 Election: ETFs to Benefit).

Guggenheim Solar ETF (LON:TAN)

SolarCity takes the fourth position in this solar ETF with about 5.7% exposure.

ARK Industrial Innovation ETF (ARKQ)

This active ETF invests in companies that are linked to industrial innovation. TSLA occupies the second spot with 7.81% share.

First Trust NASDAQ Global Auto ETF CARZ

Unlike the above funds, this ETF provides exposure to global auto stocks. Holding 33 securities in its basket, Tesla accounts for the ninth spot with 4% allocation.