By William Gavin

Special committees at both companies are assessing merger prospects but a combination is no sure thing, Musk says

Tesla and SpaceX CEO Elon Musk's companies are exploring a merger, but little progress has been made so far, he said.

Tesla shares climbed nearly 2% in extended trading Tuesday after CEO Elon Musk revealed that the company is engaging in merger talks with SpaceX.

Musk said on SpaceX's (SPCX) third-quarter earnings call that both the rocket-launch company and electric-vehicle maker Tesla (TSLA) had created special committees consisting of independent board directors to explore a merger. Musk, as CEO and a major shareholder in both entities, isn't officially clued in to the talks, he noted.

"Because I'm a conflicted party, I can't actually be in the discussions of the special committees," Musk told investors. "So, it's an odd kabuki dance where two groups of people are talking and I can't be in the conversation."

A possible merger between the companies has been a hot topic on Wall Street, especially after SpaceX acquired Musk's xAI in February. Investor interest was recently piqued when Barclays analyst Dan Levy said in an Oct. 14 client note that a merger could be announced ahead of Tesla's annual meeting in December, though that now appears unlikely. Proxy materials released this week revealed a bare-bones agenda for that meeting.

Musk said that "at this point," his companies' committees have not reached agreement on the terms of any deal, and that it is not "a certainty" that they ever will. However, he "does think there's a lot of merit" to merging the pair.

Tesla and SpaceX work together on a number of projects, including the Roadster sports car and the Terafab, a major chip-making endeavor. Tesla also sells its energy-storage products and electric vehicles to SpaceX.

Whether SpaceX investors would approve a merger isn't of major concern to Musk, who alone controls more than 80% of the voting power of its common stock, according to filings. Tesla is trickier; Musk noted on the call that 50% of all shares need to be cast in favor of a merger, which he called "quite a high hurdle."

CFRA analyst Garrett Nelson, who covers Tesla, said in a recent client note that "perhaps the only barrier" to a merger is convincing investors that it's in their best interest. That can be done, he said, by offering a "sufficiently lucrative takeout premium."

RBC analyst Tom Narayan has said a $480-a-share price could be a "receptive combo deal" for Tesla shareholders. At that price, he said, SpaceX could issue 3.23 new shares for each Tesla share held, giving Tesla investors 48% ownership of a combined entity with a roughly $3.74 trillion valuation.

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-William Gavin

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10-20-26 2014ET