Elon Musk startles market with $94bn Tesla buyout plan

Tesla chief Elon Musk has jolted financial markets with a surprise proposal to take the electric-car maker private.

Elon Musk owns about 20 per cent of Tesla. Picture: Reuters.

Tesla chief executive Elon Musk has jolted financial markets with a surprise proposal to take the electric-car maker private in what would be the biggest buyout in history.

About three hours into the Tuesday trading day, Mr Musk startled investors by writing on Twitter: “Am considering taking Tesla private at $US420. Funding secured.”

His message followed a report that a Saudi investment fund had taken a stake of almost 5 per cent in Tesla.

The notion of a buyout, which would value Tesla above $US70 billion ($94bn) is itself extraordinary, as it would be far larger than any previous take-private deal. It immediately set off a guessing game of where Mr Musk would get the funds.

The way Mr Musk broke the news added to the drama, disclosing in a casually worded tweet the prospect of a buyout that would be an enormously complicated transaction for a company struggling to generate cash. It was a shocker even for investors who are often whipsawed by Mr Musk’s erratic comments on Twitter — he joked earlier this year about Tesla going bankrupt — and it intensified a battle between his supporters and a legion of bearish investors who have made Tesla the most heavily shorted stock.

While Mr Musk continued tweeting about the possibility over the next few hours on Tuesday, Tesla’s public-relations team and main Twitter account remained silent, adding to the intrigue. An hour before the market closed, while Tesla’s stock was halted on Nasdaq, Tesla on its corporate site published a memo it said Mr Musk sent to employees that confirmed his thinking.

The shares jumped when they resumed trading late in the day, gaining 11 per cent to $US379.57, or about 10.7 per cent off the $US420 threshold.

In the memo, Mr Musk wrote that no final decision on a buyout had been made. He wrote that taking the company private would avoid the “wild swings in our stock price that can be a major distraction for everyone working at Tesla” and take away from short sellers “the incentive to attack” the company.

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Tesla would create a special-purpose fund that would let existing investors keep their shares, Mr Musk wrote. The unusual man­oeuvre would let shareholders buy or sell shares every six months, he wrote, but it wasn’t clear how such a fund would work or what the tax implications would be. Companies usually spell out the details of such proposed complex transactions in comprehensive, lawyered documents.

Mr Musk owns about 20 per cent of Tesla, with insiders owning another roughly 5 per cent and individual investors holding about 12 per cent. The remaining 62.2 per cent is held by institutions.

“Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees,” Mr Musk wrote.

The memo and Mr Musk’s tweets left many questions unanswered. Most prominently, Mr Musk didn’t say who would pay for the buyout, leaving many observers sceptical he could pull off such a transaction.

Saudi Arabia’s Public Investment Fund recently completed the purchase of a stake of almost 5 per cent in Tesla, a senior Saudi adviser familiar with the matter said on Tuesday. He said he wasn’t aware of any plan by the Saudi investment fund to increase its holding in Tesla. The Financial Times earlier reported news of the fund’s stake.

Tesla lacks many of the characteristics of a typical leveraged buyout 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. The carmaker also has regularly missed financial and production targets.

In a typical leveraged buyout (LBO), 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 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.

Tesla’s market capitalisation is about $US60bn. At $US420, a buyout would cost about $US72bn — by far the largest LBO ever, according to Dealogic.

The surprise tweets on Tuesday came as Mr Musk’s long-combative stance against Tesla’s short-sellers has grown testier.