Tesla's SolarCity bid worries Baillie Gifford's Anderson

Tesla’s second biggest institutional shareholder, Baillie Gifford, is to urgently meet with the electric carmaker to express concerns over the $3 billion (£2 billion) bid for SolarCity that has alarmed investors this week.

James Anderson, head of the Edinburgh-based group’s long-term global growth team, said Tesla’s all-share offer for the struggling solar power company had surprised him although he stressed he was not necessarily opposed to the deal.

Shares in Tesla Motors (TSLA.O), in which Baillie Gifford has an 8.2% stake, have tumbled over 10% since the company announced on Tuesday it would issue $2.5 billion of new stock to pay for the solar panel maker. This has cut the market value of the Nasdaq-listed stock to $28.7 billion.

The decline has signalled the disquiet on Wall Street at the attempt by Elon Musk, Tesla’s chief executive, founder and 21% shareholder, to pull off a premium bid for SolarCity, where he is also chairman and owner of a 22% stake.

Musk has argued that uniting Tesla and SolarCity makes sense and would create an ‘integrated sustainable energy company’ with the former’s electric cars, battery manufacturing and electricity storage operations added to the latter’s solar panel installation and leasing business.

However, critics say Musk is using Tesla shareholders to bail out SolarCity (SCTY.O), which has repeatedly missed earnings forecasts and whose shares have lost three quarters of their value in the past year.

Speaking yesterday after an investor event for Scottish Mortgage Trust (SMT ), Baillie Gifford’s flagship fund for which he is joint manager, Anderson said he retained faith in Musk.

The South African born Canadian is a serial entrepreneur who made his first fortune with Paypal and is now simultaneously challenging traditional car manufacturers and power companies, while seeking to get people to Mars with his privately-owned SpaceX company.

‘Our judgement is that Elon Musk is a force for good,’ said Anderson.

However, he viewed the timing of the bid, a month after Tesla sold nearly $1.5 billion in new shares to pay for the roll-out of its Model 3 mass-market vehicle, and its communication to shareholders as unsatisfactory.

‘Having raised money recently would we have been more comfortable if he had told us?’ Anderson asked. ‘Yes,’ he stated.

Anderson said Tesla risked a capital markets freeze following the furore. This would hurt a company that has raised over $6 billion from investors in the past three years to cover losses and fund its ambitious growth plans.

Musk has said he will step aside from boardroom discussions on the proposed takeover and will not vote his shares. This puts Baillie Gifford in an influential position as it is Tesla’s second biggest external shareholder after Fidelity on 11.2%, according to Thomson Reuters data.

Nevertheless, it is an embarrassment for Anderson who recently praised Tesla as an example of the sort of visionary, high growth businesses he liked to back.

Moreover, Anderson and Tom Slater, the other co-manager on the £3.1 billion Scottish Mortgage Trust, have made much of their access to leading business and technology pioneers based on years of loyal investment in their firms by their fund.

Earlier in the evening session Anderson had spoken eloquently about the deadly threat that Tesla posed to energy, transport and utility companies. ‘The destructive power of this business is getting exponentially more important and damaging,’ he said.

With 4.7% of their fund invested in Tesla and 0.1% in SolarCity Scottish Mortgage shareholders are getting a taste of that power in a way they might not like.

That said, the investment trust’s holding in Tesla rose 26% in the year to 31 March, making it one of the portfolio’s winners in what was otherwise a flat year for overall performance. Over the last five years the managers’ policy of backing Internet disrupters and technology-powered disrupters has generated a 94% total return for shareholders, making it the third best performing Global investment trust.

Amazon changing

Although relations with Musk may be strained, Anderson remains on good terms with Jeff Bezos, the founding chief executive of Amazon (AMZN.O), the e-commerce giant that is Scottish Mortgage’s biggest position at 8% of the fund. Its shares soared 64% in the trust’s 2015/16 financial year and the two met recently, Anderson said.

Although Bezos is feted as an Internet visionary for forging a $335 billion business, Amazon has come under fire for allegations of tough working conditions at its distribution depots and its low tax payments.

Anderson said it was odd to criticise the company for not paying enough tax when it was notorious for not making profits either, re-investing profits from online shopping portal into the growth of other businesses such as Amazon Web Services.

Nevertheless, he claimed the company took its responsibilities seriously and that the picture could change quickly, given AWS, which offers ‘cloud’ computing infrastructure to corporate customers, was very profitable.

The view from the top of Amazon, said Anderson, was that ‘our future is deeply dependent on being respected’.

Whether Musk and Tesla retain the respect of all their shareholders is unclear, however.