Opinion
The industrial and financial logic of a merger of SpaceX and Tesla, which Elon Musk has revealed is being evaluated, is compelling – for shareholders, and for the world’s richest man personally.
The prospective combination being assessed by a special committee of both companies’ boards would create an entity with a $US3.6 trillion ($5.1 trillion) market capitalisation, ranking behind only Nvidia ($US5.7 trillion), Apple ($US4.9 trillion), Alphabet ($US4.1 trillion) and Microsoft ($US3.8 trillion) in market value.
Market size isn’t an end in itself, but it would make it easier for Musk to raise the massive volumes of equity and debt needed to feed the voracious appetite for capital that the two companies require for their increasing investments in artificial intelligence.
It would give Musk access to Tesla’s cash and free cash flows –$US15.22 billion and $US1.53 billion in the September quarter – to help fund SpaceX’s accelerating spending on AI. About $US16.4 billion of SpaceX’s $US19.6 billion of capex in the third quarter was devoted to AI, and it has said its total capex in the December quarter could be as much as $US40 billion.
At face value, combining SpaceX’s rockets, satellites, AI and social media platform with Tesla’s electric vehicles, batteries and solar might not appear as compelling, but there would be plenty of potential synergies available if they were merged.
Apart from the fact that Tesla does supply SpaceX with billions of dollars worth of batteries, graphics processing units, software and even Cybertrucks, and is joint-venturing a chip-making factory with SpaceX, Tesla is increasingly an AI company itself – its self-driving vehicles and robots are powered by AI. Tesla also has a $US2 billion investment in SpaceX from that company’s acquisition of another Musk business, xAI.
While there is a sci-fi feel to the merger concept, it does, on paper at least, appear to make significant sense.
Tesla’s energy storage expertise and robots could also aid SpaceX, if it is to pursue Musk’s bold ambition of building data centres in space and colonising Mars.
While there is a sci-fi feel to the merger concept, it does, on paper at least, appear to make significant sense, even though it could restrain Tesla’s ability to invest in developing its mainstream auto business.
It also makes sense for Musk at a personal level, bringing together the two largest entities that he controls and removing the conflicts of interest that flow from their swelling strands of related-party dealings.
The deal would create cleaner governance and tighter focus for Musk and would also bring significant personal financial benefits for the mega-billionaire.
Musk has an economic interest of about 42 per cent in SpaceX (it would be materially higher if his unvested shares were included), but a voting interest of a little over 80 per cent thanks to his “super-voting” shares. He has a more conventional 20 per cent voting and equity interest in Tesla.
Both companies have awarded him share-based incentives that, if he were able to meet all their (extremely ambitious) hurdles, would give him trillion-dollar payouts.
If there is a merger, it is probably going to be done through SpaceX, with the larger market capitalisation, acquiring Tesla via a share-based deal.
If it were a nil-premium merger, Musk would probably end up with an economic interest in the enlarged SpaceX closer to 30 per cent (40 per cent if all his unvested shares were to vest), but retain a voting interest of close to 75 per cent.
That could be an obstacle at the Tesla level – shareholders would go from being able to outvote Musk comfortably (in theory at least, given that the Tesla board and shareholders appear to be in thrall of him) to being locked into a company where he has absolute control. That concession may argue against a nil premium deal.
For Musk, a change of control at the Tesla level would probably trigger immediate vesting of his performance-based incentives, without having to achieve the performance hurdles. That could add tens of billions, if not hundreds of billions, to the paper wealth of the world’s richest man.
There are some potential obstacles, even if Musk and his boards commit themselves to the merger.
Musk and his companies have a raft of contractor relationships with the US government, including some that would have national security implications and others that might fall foul of antitrust laws, particularly if the Democrats were able to gain control of Congress and the White House.
China would also have a say and might not be enthusiastic, given SpaceX is a US defence contractor. About half of Tesla’s global EV production is based in China, so there would be significant commercial implications if Beijing opposed the deal.
Tesla could spin off its operations in China or sell them, of course, but that would gut its international EV business.
The third-quarter results released this week for both companies provide some sense of what the mega company would look like, although the related-party revenues and Tesla’s interest in SpaceX would be excised in a merger and their assets would be revalued (probably significantly higher) on a mark-to-market basis.
In crude terms, however, the combination would have generated revenue of roughly $US43 billion and profits of more than $US5 billion in the September quarter. It would have combined debt and finance leases of close to $US50 billion and shareholder funds of about $US260 billion, with about $US135 billion of cash and investments.
Tesla is cutting back severely on its capex. Its spending was about $US1 billion lower than in the second quarter and about $US3 billion less than the market expected. Its free cash flow was $US1.53 billion where the market expected it to burn $US5 billion.
SpaceX, which has been renting out computing power in a market where “compute” is becoming scarce as demand is rising rapidly even as the rate at which data centres are being built is slowing, had negative free cash flow in the quarter – probably close to $US10 billion – with the gap from $US6.9 billion of capex in the same quarter last year to $US19.6 billion the obvious cause.
The potential revenues from the compute deals SpaceX has been striking with companies like Anthropic and Google, where it is selling capacity for about $US1 billion a month in three-year deals, will increasingly help fund Musk’s extremely expensive visions of the future.
His engineers appear to be able to build AI infrastructure faster and more efficiently than others and, in a market increasingly short of compute, that is a very attractive position to be in. It can generate substantial high-margin revenue while SpaceX’s own AI demand for compute falls well short of the capacity it has today and on its drawing boards.
Musk’s dream of data centres in space and colonies of Mars would be more easily funded and realised, however, by combining Tesla’s balance sheet, cash and cashflows, its robots and batteries and energy storage expertise with SpaceX’s AI intellectual property and hard assets, its rockets and its satellites.
The deal would create an integrated entity with better and probably cheaper access to equity and debt than both companies can get on their own today.
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