DUBLIN – With Tesla’s cash-flow woes mounting up and its share price valuation looking rich, now seems like an interesting time for Elon Musk to tweet that he plans to take the company private. Musk has pranked Twitter before, with a now-infamous series of bankruptcy tweets in April this year, so any rational person would take a random tweet from Musk with a grain of salt. However, Tesla later confirmed the plan in a memo and taking Tesla private would make sense. The company needs cash desperately and a private equity buyout or a debt-based buyout by Musk could be the answer to some prayers. The company might also benefit from some time away from the quarterly pressure of a US listing, not to mention some respite from the relentless assault by shorts. However, while Musk claims that he has the funding lined up, it’s not immediately clear who would want to pay billions for an automaker that still struggles to turn a profit. – Felicity Duncan
Musk Says in Tweet He Is Considering Taking Tesla Private
By Mike Colias and Miriam Gottfried
(The Wall Street Journal) Tesla Inc. Chief Executive Elon Musk jolted financial markets on Tuesday with a surprise proposal to take the electric-car maker private in what would be the biggest buyout in history.
___STEADY_PAYWALL___
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
About three hours into the trading day, Mr Musk startled investors by casually stating on Twitter: “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 far larger than any previous take-private deal. 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.
Over the next three hours, Mr Musk replied to questions on Twitter while Tesla’s public relations team and main Twitter account remained silent. After Tesla’s stock was halted on Nasdaq at around 2 p.m., Tesla on its corporate site published a memo it said Mr Musk sent to employees on Monday that confirmed the plan.
The shares later jumped when they resumed late in the day, gaining 11% to $379.57, or roughly 10.7% off the $420 threshold.
In the memo, Mr Musk wrote that no final decision on a buyout has 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.
Mr Musk said in the memo that existing investors could keep stakes in a private Tesla or sell at $420. He said Tesla shareholders would be able to sell or buy shares every six months. Tesla would create a “special purpose fund,” he wrote on Twitter, enabling shareholders to keep their stock. “My hope is *all* current investors remain with Tesla even if we’re private,” Mr Musk tweeted. It wasn’t immediately clear how such a fund would work.
“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,” he wrote.
In the memo to employees, Mr Musk didn’t say how he would pay for the giant buyout, raising questions about the ability of a cash-strapped company to raise the funds needed for what would be the largest take-private transaction in American corporate history.
Saudi Arabia’s Public Investment Fund recently completed the purchase of a nearly 5% stake in Tesla, a senior Saudi advisor 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.
Mr Musk owned a roughly 20% stake in Tesla as of June 13, according to S&P Global Market Intelligence.
Tesla’s market capitalization 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 tweets came 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 skepticism 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, which went public in 2010, 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 before. 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 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 materializes, the stock bounce following Mr Musk’s tweet could help the company preserve 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.
—Andy Pasztor, Dave Michaels and Liz Hoffman contributed to this article.
Write to Mike Colias at [email protected] and Miriam Gottfried at [email protected]
