SOLARCITY CORP (Reuters) - To Elon Musk, Tesla Motors Inc's (>> Tesla Motors Inc) planned buyout of SolarCity Corp (>> SolarCity Corp) was a "no-brainer".
Investors and analysts clearly had a bit more trouble figuring out the rationale, with the electric car maker's shares dropping as much as 10 percent in early trading on Wednesday.
More than $3 billion was wiped off Tesla's value as the stock staged its biggest percentage drop in nearly two years.
Musk, Tesla's founder and CEO, was undaunted, saying on an investor call on Wednesday that the electric car maker had the potential to become a trillion-dollar company.
The serial entrepreneur, who owns 19 percent of Tesla and 22 percent of SolarCity, said when deal was announced on Tuesday that it would open up opportunities for Tesla to sell customers an electric car, a home battery and a solar system all at once.
"I have zero doubt about the deal, should have done it sooner," he said on Wednesday's call.
Analysts do have doubts, though.
"While no doubt the Tesla bulls will hail the combination as visionary, we believe the assumption of another $2.6 billion of debt to fold in a solar company with limited synergies and uncertain growth/cash prospects only reinforces our negative view of Tesla," Barclays analyst Brian Johnson said in a note.
RBC Capital Markets analyst Joseph Spak was also skeptical.
"While we don't doubt that some customers who are interested in electric vehicles and storage products are also interested in going solar, we don't necessarily buy that there is a meaningful cross-sell opportunity – especially currently," he said.
The all-stock deal, worth up to $2.8 billion, also could be a source of distraction for Tesla as it ramps up production, analysts said.
Tesla, which revealed ambitious production plans in May for its upcoming Model 3 sedan, had already been setting off alarm bells among investors for its cash burn.
The car maker, which had long-term debt and capital leases of $2.5 billion as of March 31, sold $1.7 billion of shares in May to fund production.
SolarCity, led by Musk's first cousin Lyndon Rive, has struggled with rising costs and intensifying competition and has never made an annual profit since its IPO in 2012.
Musk said he expected SolarCity to become cash-flow positive in the next three to six months.
The company, whose shares were up 9.2 percent in early, has about $6.24 billion in liabilities, including debt.
SolarCity is expected to burn roughly $400 million in cash from operations next year and report an adjusted loss of nearly $1 billion, based on consensus estimates, Pacific Crest analysts said in a research note.
With both companies burning through cash, the combined entity is likely to magnify the losses and cash-burn that both are seeing individually, Barclays analysts said.
Tesla, established in 2003, has never made a profit, although Musk has said the company is likely to start making money this year.
Tesla's shares were trading at $202.33 at mid-morning, while SolarCity's were trading at $22.86.
(Reporting by Supantha Mukherjee and Narottam Medhora in Bengaluru; Editing by Ted Kerr)
By Supantha Mukherjee and Narottam Medhora
