Tesla offers $2.6 billion to buy sister firm SolarCity

SolarCity Corp agreed to be acquired by sister company Tesla Motors Inc in a deal worth $200 million less than the initial offer, sending shares of both companies down in early trading on Monday.

Electric vehicle maker Tesla expects to achieve "significant" cost savings and "dramatic improvements" in manufacturing efficiency as a result of the acquisition of solar panel installer SolarCity, Tesla Chief Executive Officer Elon Musk said on Monday.

Musk said the combined companies will have a "stronger balance sheet," but likely will require a "small equity capital raise" next year. Both companies have been burning through cash and have projected achieving positive cash flow later this year.

Musk is the largest shareholder in both companies and is chairman of SolarCity. His cousins Lyndon Rive and Peter Rive are co-founders of SolarCity.

The two companies on Monday announced an agreement to merge, with Tesla holding 93.5 percent of the combined companies and SolarCity 6.5 percent. The deal is expected to win approval in the fourth quarter, the companies said.

The combined entity would sell solar panels, residential and commercial battery storage systems and electric vehicles under a single brand.

"Solar and storage are at their best when they're combined," the companies said in a blog post on Tesla's website.

Musk unveiled an updated "master plan" last month, sketching out a vision of an integrated carbon-free energy enterprise, offering electric vehicles, car sharing and solar energy systems.

The deal includes a "go-shop" provision that allows SolarCity to solicit offers from other potential buyers for 45 days through Sept. 14.

Up to Friday's close, SolarCity's stock had risen about 26 percent, valuing the company at $2.62 billion, since Tesla first made an offer on June 21 that was valued at $2.8 billion.

The companies said on Monday that SolarCity stockholders would receive 0.110 Tesla common shares for every share held.

The offer values SolarCity at $25.37 per share, based on the five-day volume-weighted average price of Tesla shares as of Friday.

SolarCity had formed a special committee to review Tesla's initial offer, which was pitched at 0.122 to 0.131 Tesla shares for each SolarCity share.

SolarCity , shares were down 5.1 percent at $25.34, while Tesla dropped 1.9 percent at $230.40.

Tesla and SolarCity expect to save $150 million in costs in the first full year after the deal closes as the combination would improve manufacturing efficiencies and reduce customer acquisition costs. Musk said he thought the combined companies could "significantly exceed" that mark in the first year.

Up to Friday's close, Tesla shares had risen 7 percent since the company first announced the offer.

(Reporting by Swetha Gopinath in Bengaluru and Paul Lienert in Detroit; Editing by Saumyadeb Chakrabarty and Jeffrey Benkoe)