The rooftop solar installer said the result of the merger would be the creation of the world's first "vertically integrated sustainable energy company."
SolarCity has already been reselling the lithium-ion batteries that Tesla makes for both commercial and residential energy storage systems as well as for use in its all-electric vehicles.
Tesla founder and CEO Elon Musk is also the co-founder and chairman of SolarCity, which is run by fellow co-founder and CEO Lyndon Rive and his brother, CTO Peter Rive. Both men are Musk's cousins. Musk owns 22% of SolarCity's stock and 21% of Tesla.
"Solar and storage are at their best when they're combined," SolarCity said in a blog. "As one company, Tesla (storage) and SolarCity (solar) can create fully integrated residential, commercial and grid-scale products that improve the way that energy is generated, stored and consumed."
Tesla is preparing to scale up its production of Powerwall and Powerpack stationary storage products through its Gigafactory, which officially opened last week. By 2018, the factory will produce enough battery packs to allow Tesla to build around 500,000 electric cars. The electric carmaker plans to release its least expensive mass-consumer vehicle, the Model 3, around that time.
By 2020, Musk believes the factory will produce 35 gigawatts (a gigawatt is one billion watts) of battery capacity, with the objective of driving down the per-kilowatt-hour (kWh) cost of battery packs by more than 30% through economies of scale.
SolarCity said it is getting ready to offer "next-generation differentiated solar solutions."
"By joining forces, we can operate more efficiently and fully integrate our products, while providing customers with an aesthetically beautiful and simple one-stop solar + storage experience: one installation, one service contract, one phone app," the company said.
Industry analysts have given the Tesla/SolarCity merger mixed reviews.
Raj Prabhu, CEO Mercom Capital Group, a clean tech research and communications firm, said he's skeptical of the merger because the ties between the two companies will likely create conflicts of interest.
Neither Tesla nor SolarCity are profitable and have incurred massive amounts of debt because the companies are spending in order to expand in what are still fairly niche industries.
"If Musk wasn't a majority shareholder in both the companies, there would be very little chance for a deal like this to go through," Prabhu said. "They are still very different businesses and a slump in one business will be a drag on the whole company and become a distraction."
MJ Shiao, director of solar research at GTM Research, said he shares Tesla's vision that a comprehensive and integrated energy solution "will be necessary for consumers to control their own energy destiny in the wake of changing electricity rate structures across the country.
"However, it's unclear whether a merger is necessary for Tesla and SolarCity to build and brand these products together," Shiao said.
Last year alone, Tesla received a significant amount of revenue from selling lithium-ion battery systems to SolarCity; in fact, it amounted to 36% of all behind-the-meter battery revenue, according to GTM Research.
The global energy storage market is expected to double as homes and businesses adopt battery energy storage to supplement rooftop solar and other renewable energy systems, according to a new report by IHS.
Over the next decade, lithium-ion (Li-ion) batteries will become the mainstream energy-storage technology, IHS said, with more than 80% of global energy storage installations including the batteries by 2025.
SolarCity believes the merger will produce cost synergies of about $150 million in the first full year after the deal closes.
"We also expect to save customers money by lowering hardware costs, reducing installation costs, improving our manufacturing efficiency and reducing our customer acquisition costs. We will also be able to leverage Tesla's 190-store retail network and international presence to extend our combined reach," it said.
As part of the agreement, SolarCity has a 45-day period known as a "go-shop," which runs through Sept. 14. That allows SolarCity to solicit alternative proposals during that time. Each company today filed a Form 8-K with the SEC that provides additional details regarding the transaction.
SolarCity said that while agreeing on the merger is a "big step" it's not the "finish line." It expects the deal to close something in the fourth quarter of this year.
Before that can happen, the acquisition must approved by a majority of the disinterested shareholders of both Tesla and SolarCity voting at each shareholder meeting and win regulatory approval.
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