Elon Musk considers taking Tesla private

Elon Musk jolts markets with Twitter statement suggesting he may take Tesla private in deal that would value Tesla over $70bn.

Elon Musk is considering taking Tesla private. Picture: AFP.

Tesla Chief Executive Elon Musk jolted financial markets on Tuesday with a surprise statement on Twitter suggesting he is considering taking the electric-car maker private.

Mr Musk’s account tweeted at 12:48pm. ET: “Am considering taking Tesla private at $420. Funding secured.”

The notion of such a deal, which would value Tesla above $70 billion, is itself extraordinary, as it would be by far the biggest take-private deal in history. It immediately set off a guessing game of where Mr Musk would get the funds.

The message also baffled investors and other observers, not only due to the highly unusual nature of notifying shareholders of such an extraordinary plan via Twitter, but also because Mr Musk has a history of making jokes about Tesla and other erratic comments in tweets.

Am considering taking Tesla private at $420. Funding secured.

— Elon Musk (@elonmusk) August 7, 2018

About 30 minutes later, Mr Musk’s account tweeted “420” in response to a reporter’s tweet asking what price buyers might pay.

Later, Mr Musk’s account tweeted that he doesn’t have a controlling vote and won’t be selling his shares. Mr Musk owned a roughly 20% stake in Tesla as of June 13, according to S&P Global Market Intelligence.

The account stated that Tesla would create a “special purpose fund” enabling shareholders to keep their stock. “My hope is *all* current investors remain with Tesla even if we’re private,” the account tweeted. “Will ensure their prosperity in any scenario,” he said.

Absolutely. Am super appreciative of Tesla shareholders. Will ensure their prosperity in any scenario.

— Elon Musk (@elonmusk) August 7, 2018

He went on to confirm there would “def” be no forced sales but said going private was contingent on a shareholder vote.

Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote. https://t.co/bIH4Td5fED

— Elon Musk (@elonmusk) August 7, 2018

It wasn’t immediately clear how such a fund would work.

Tesla’s stock was up 7.4% to $367.25 before it was halted on Nasdaq in afternoon trading. It would need to climb another 14.4% to reach $420. The Financial Times reported on Tuesday Saudi Arabia’s sovereign-wealth fund has accumulated a roughly $2 billion stake in the company.

Tesla and Mr Musk didn’t responds to requests for comment.

However he released a statement explaining his rationale to staff, on Tesla’s Twitter account.

Taking Tesla Privatehttps://t.co/kw4eHOJfBh

— Tesla (@Tesla) August 7, 2018

“As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders,” he wrote on the account. “Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”

Tesla’s market capitalisation is roughly $60 billion. At $420, a leveraged buyout would cost about $72 billion — by far the largest LBO ever, according to Dealogic. It would eclipse the current record holder, Energy Future Holdings Corp., formerly TXU Corp., which was bought in 2007 for $32 billion. The Texas utility filed for chapter 11 bankruptcy protection in 2014.

The surprise tweet comes as Mr Musk’s long-combative stance against Tesla’s short sellers has grown testier in recent months. He has repeatedly used Twitter to chide investors who are betting against his company, sometimes offering vague positive outlooks for the company that seemed to boost the stock, hurting short sellers’ positions.

Mr Musk has been embattled for several months amid investor concern over whether the company’s Fremont, Calif., factory can ramp up production of the Model 3 sedan. He told analysts last week that the pace of 5,000 sedans a week — a milestone Tesla reached toward the end of June — can be sustained, despite scepticism from some analysts.

Mr Musk has insisted that the increased pace of Model 3 output will allow the company to avoid the need to raise more capital. But many equity analysts aren’t convinced.

In a research note Tuesday, Morgan Stanley analyst Adam Jonas said he expects Tesla to raise equity of $2.5 billion in the fourth quarter, despite hiking his Model 3 production forecast by 50%, to about 50,000 cars in the third quarter.

Mr Musk has promised investors Tesla would start making a profit going forward starting in the third quarter. The company finished the second quarter with $2.2 billion of cash, and has said it needs a minimum cash balance of $1 billion.

Morningstar analyst David Whiston said the recent progress on Model 3 production “gives more credibility to the company” if Mr Musk’s plan is to secure funding for taking Tesla private.

Taking it private would allow the billionaire “to not constantly worry about going to the public markets for more money,” Mr Whiston said. “He can do what he needs to do behind closed doors and keep growing the company without all that extra scrutiny.”

Mr Musk has informally floated the idea of a private Tesla. In an interview with Rolling Stone published in November 2017, he said having to answer to public shareholders “makes us less efficient,” and said “I wish we could be private with Tesla.”

He has also toyed with taking his other company, Space Exploration Technologies Inc., public. The rocket maker, where Mr Musk is founder and CEO, was last valued privately by investors at $21 billion. But Mr Musk has nixed that idea more recently, people close to him have said, because the entrepreneur in him just couldn’t stomach the idea of being held publicly accountable to shareholders.

Tesla lacks many of the characteristics of a typical LBO candidate, including a large, predictable stream of cash flow. Even though its sales are rising, Tesla still has been losing money and burning copious amounts of cash. It also has regularly missed financial and production targets.

In a typical leveraged buyout, the buyer contributes a relatively small amount of equity and uses debt to fund the remainder of the transaction. Even accounting for Mr Musk’s roughly 20% ownership stake, and any additional equity he could raise, such a deal would require tens of billions of dollars in bank borrowing, and it isn’t clear who would provide it.

U.S. mutual funds and exchange-traded funds own 54.1 million shares, or 31.8%, of the electric car maker’s stock, according to Morningstar.

Even if no deal for Tesla materialises, the stock bounce following Mr Musk’s tweet could help the company generate some needed cash. Tesla has more than $1.1 billion in convertible bonds that will come due over the next seven months absent a sustained rise in its share price.

That starts with $230 million of convertible bonds set to mature in November if its stock doesn’t reach a conversion price of $560.64, followed by $920 million that mature in March, if shares remain below the trigger price of $359.87.

The March notes would be convertible into Tesla stock instead of redeemable for cash — a scarce resource for the company.

The Securities and Exchange Commission has previously said it is legal for companies to announce material information via social media and other websites, as long as the firm has told shareholders where to look for such data.

The regulator explicitly allowed such communication in 2013 when it decided against suing Netflix Inc. CEO Reed Hastings for announcing market-moving information about the company’s subscribers on his personal Facebook page.

The Wall St Journal