SA Asks: Should Tesla merge with SpaceX?

Last week, Barclays analysts said they believe an all-stock merger between Tesla (TSLA) and SpaceX (SPCX) could be announced before Tesla's annual meeting, which is expected to be held by Dec. 6.

We asked Seeking Alpha analysts Julia Ostian, Dhierin Bechai, Mike Zaccardi, and Elizabeth Pramila if they thought Tesla (TSLA) should merge with SpaceX (SPCX).

Julia Ostian: These are two different questions in my opinion: would Tesla (TSLA) merge with SpaceX (SPCX), and should it?

Would it? I think it’s likely, and I wrote about this even before the SpaceX IPO, because I believe Elon already realized that the Tesla story would not be as explosive as he was selling it a couple of years ago, which I explained in my latest Tesla article.

Should it? For Musk, yes, since an all-stock deal will move Tesla’s cash, debt, and, most importantly, “Musk premium” into one entity, with Terafab and xAI needing a lot of capital.

For Tesla (TSLA) shareholders, I’m much less sure. They would trade a company with a 1.4% operating margin but still some hope for a better future (even if built on narratives) for a piece of another very expensive company that burns cash on AI. The dilution risk is enormous, and the chance for that other company to ever justify its price is very small.

If the deal is announced, I’d watch not only Tesla (TSLA) but also funds with large Tesla weights like the Consumer Discretionary Select Sector SPDR (XLY) and ARK Innovation ETF (ARKK), along with space names like Rocket Lab (RKLB) and the Procure Space ETF (UFO). A merger of this size would probably move the entire EV and space sectors.

Dhierin Bechai: I do not believe that Tesla (TSLA) and SpaceX (SPCX) should merge. Both companies consist of business segments and revenue streams that have yet to mature, and without maturing those businesses, the valuation for neither of the companies can be justified.

Combining those companies would fit what we have seen Elon Musk doing previously. However, it also creates too much of an impression that business combinations are executed to somewhat mask overpromising and underdelivering and still maintain access to funds, capital, and debt markets to fund the delayed growth ambitions. It would become a conglomerate consisting of companies and segments that are overvalued.

(Dhierin Bechai leads the SA investing group The Aerospace Forum.)

Mike Zaccardi: I think it makes sense for Tesla (TSLA) and SpaceX (SPCX) to merge. Last Thursday's Roadster event showed that the two firms are already collaborating, and CEO Elon Musk likely wants more control over both companies. I see the possible merger as being supportive for TSLA but not a major SPCX upside catalyst, as SPCX is larger than TSLA.

Elizabeth Pramila: I do not think a merger makes economic sense for Tesla (TSLA) investors. Barclays' Dan Levy makes a strong case for synergies, no doubt, but a potential merger would effectively drain cash flows from TSLA, diverting it from Cybercab and Optimus ramps into Mars-shot projects, as just one example.

While it is true that a merger would simplify the corporate structure, eliminate related-party reporting, and bring Terafab and SpaceXAI under a unified umbrella, one should also be cognizant of the cons of such a business combination. This would essentially include TSLA shareholders paying for SPCX's loss-making projects, particularly AI.

Levy's considerations are logically and mathematically sound. But my view is that the broader considerations around which entity makes money and which loses it at an even faster pace are a material vote against such a merger.

I believe the key hurdle at this point would be TSLA shareholders' approval of any merger proposal.