Elon Musk sees "a lot of merit" in combining Tesla and SpaceX, but the decision is not his to make: two special committees he cannot join and a Tesla shareholder vote he calls a high hurdle stand in the way.
That tension runs through a deal that many analysts call inevitable. Musk, a self-described 'conflicted party', said the committees are yet to agree on the terms and a merger is not certain, even though Wall Street expects a deal by the end of next year.
Shares of SpaceX were up 8.4 percent, while Tesla gained 1.5 percent in premarket trading.
SpaceX and Tesla are jointly developing the Terafab chip plant, and AI now makes up more than half of SpaceX's revenue, with another $35 billion to $40 billion spending likely in fourth quarter to fund further expansion.
"I think a Tesla-SpaceX merger makes sense. It's very strategic because both companies are rapidly transitioning into artificial intelligence and autonomous systems, and both have huge infrastructure projects underway," said Justus Parmar, CEO of Fortuna Investments and an investor in both companies.
"It would also avoid redundancy and the time he spends going back and forth between two entities, and there would be a reduction in public company overhead, legal costs and administrative burdens."
Analysts have said that burgeoning capital spending for expensive AI and space infrastructure would weigh on SpaceX's free cash flow, a strain a combined company could ease by sharing services and borrowing jointly with Tesla.
They also point to last week's Roadster unveiling, where a Tesla car built with SpaceX rocket thrusters flipped and leapt over a truck, as a teaser for what a combined company could produce.
TESLA'S VOTE IS THE HURDLE
Control may also be part of Musk's appeal for a merger. Musk holds about 85 percent of SpaceX's voting power through super-voting shares. But at Tesla he has roughly 20 percent.
Bill Birmingham, head of research at REX Financial, estimates a merger would give the billionaire about 57 percent of voting rights.
Ryan Zurrer, founder of Dialectic, puts it at 58 percent at an exchange ratio of 0.7 of one SpaceX share, the illustrative level Barclays has floated.
No ratio has been negotiated. Zurrer said a ratio near 0.6 would be needed for Musk to keep control if he sold more equity, and that "the biggest hurdle will be the Tesla shareholders vote vs Elon's own incentives".
Musk said Tesla side needs a majority of all shares, not just those voted, so every uncast ballot counts against a deal. Analysts have flagged turnout as a risk, citing uncast broker votes at last year's meeting as a potential factor that could affect chances of a deal going through.
Governance and regulatory questions would follow. When Tesla bought SolarCity in 2016, a Delaware court cleared it after years of litigation but said it should have formed an independent committee.
"A deal where one man runs both sides will draw tough questions on governance," said Josh Gilbert, lead analyst for APAC at eToro.
The business case, not just the process, could also decide it. Ipek Ozkardeskaya, senior analyst at Swissquote, said if Tesla is better off exploring AI synergies with other companies, the deal "could be rejected by investors".
Tesla is set to report third-quarter results after markets close. Analysts said they were also watching out for disclosures of merger talks in regulatory filings ahead of the automaker's Dec 3 annual shareholder meeting.