Another big promise from Musk, but serious investors aren’t biting, treat $82bn Tesla buyout as a joke

LONDON — South African-born entrepreneur Elon Musk is back in the headlines after a move that was outrageous, even by his standards. It came via Twitter, where Tesla’s founder has been super-active in recent months as the pressure on his business has escalated. It seems few had any inkling of what he was about to unleash. Musk owns 20% of Tesla’s shares. Apparently he will now buy out the other 80% at a price of $420, with funding already secured. That’s far above the highest level the share has traded at. And at a price where lenders would need to stump up $70bn in cash to buy a company that hasn’t made a profit in any of its 15 years in business. For context, the biggest ever leveraged buyout was in 2007 when a private equity group that included KKR and Goldman Sachs did a $45bn deal to acquire Texan utility TXU Energy. After surging on the news, Tesla’s share price eased back to around $370, a $50 discount to the supposed buyout offer. That tells us everything. Serious investors think it’s a hoax. – Alec Hogg

This is The Rational Perspective, I’m Alec Hogg. In this episode Elon Musk wants to buy Tesla for $82bn.

SA born entrepreneur, Elon Musk, is back in the headlines today after a move that was outrageous, even for him. It came via Twitter where Tesla’s founder has been super active of late. It seems that nobody outside of Musk’s own head had any inkling of what was to come. Here’s how the Bloomberg Daybreak News Bulletin opened this morning.

Tesla’s CEO, Elon Musk, shocking investors with news that he could take the company private. Word from Musk came yesterday afternoon in the form of a tweet and a blog post that left many questions unanswered. Dana Hull reports from our Bloomberg 960 Newsroom in San Francisco.

The fact that he wants to take Tesla private is not a surprise. He’s talked about this in previous interviews with us. There’s been no SEC filing. We’re not sure when there’s a board vote. Presumably, the board is onboard with this but we haven’t heard from any of them. We really don’t have anything beyond Elon’s tweets and the blog post.

Now, Musk suggested a price of $420 a share to take Tesla private. That would value the company at $82bn, and would amount to the largest leveraged buyout in history.

Wall Street is sceptical of Musk’s plans. Dennis Gartman is editor and publisher of The Gartman Letter.

This is not going to happen. I think this is just game to put the fear of God into the shorts once again, which clearly, he did but do I think that this is going to come to fruition? I doubt it.

Shares at Tesla surged 11% yesterday but closed around $380, far below the $420 levels cited by Musk.

David Kudla, CEA at Mainstay Capital Management is shorting Tesla and says, ‘he will stay with that position.’

This doesn’t change my perception or outlook and it hasn’t changed my outlook on my short position. In fact, we’ve been shorting more shares today on the strength of the stock.

Just a week ago Tesla reported another quarterly loss where it burned through 100’s of millions of dollars.

Still, there are those who think $420 a share is too low for Tesla. Ross Gerber, president and CEO at Gerber Kawasaki and a Tesla shareholder.

I value the company at $571. This is a rip-off, I’m not selling for $420. Do you know how many companies I can find like Tesla out there – there’s none?

The biggest question around Elon Musk’s plan is funding, not in his tweets nor his blog post yesterday made mention of how Tesla would pay to go private. Tesla’s shares down 1% at early trading following yesterday’s 11% gain. CEO, Elon Musk took to Twitter yesterday saying, he could take the electric car company private at $82bn valuation. Tigress Financial Chief Investment Officer Ivan Feinseth says the move doesn’t make sense for Tesla.

It doesn’t make sense because he’s in a growth stage. He’s not in a mature stage. If he needs the public markets for financing it would be easier to raise financing, in both equity and debt, for him if he’s a public company.

At that $82bn valuation, it would be the largest leveraged buyout in history.

Let’s pause for a moment. Musk owns 20% of Tesla’s shares. At the price that he tweeted, $420 a share, he and his partners would need to stump up $70bn in cash. For context, the biggest ever buyout of shareholders or what they call a leveraged buyout was in 2007, when a private equity group that included KKR and Goldman Sachs, did a $45bn deal to acquire a Texan utility, TXU Energy. So, Musk and co want to put up almost double that. But what about the way that Musk took to Twitter to share the news? Here’s Karyn Kavanagh, senior vice president of Voyo Investment Management.

Well, it’s certainly unprecedented and we haven’t seen any of our CEOs do that, and it may actually be inappropriate too, so I think it’s going to playout over the next couple of days and we’re going to find out more about it but he’s definitely thrown the monkey wrench into the news this morning, and we are seeing a lot of coverage on it, but we’ll find out exactly what’s going to happen. But as we know, Elon Musk does things his way so, it should be interesting.

Let’s get more on these developments now from Bloomberg opinion columnist, Alex Webb, who joins us from our London bureau. Alex, good morning and welcome. Judging by what we’ve been hearing from analysts and shareholders, there are some real sticking points to getting this done, if Musk is serious about it. Yesterday Tesla shares rose around 11%. This morning they’re down almost 1% so do we now rate investors as sceptical?

I think even from the initial reaction, as I said, and not just scepticism. The shares, even as they peaked yesterday, were still well below the $420 price that Elon muted. I think they peaked at about $379. Some of those gains you can probably attribute to skittish short investors to kind of get out of the stock. Clearly there was a certain amount of optimism as well as someone buying that stock but there does remain a lot of scepticism that he can plug that $50bn gap.

Elon Musk Photographer: David Paul Morris

This was an interesting way that he chose to signal his plans, if they are indeed plans, going on social media?

Yes, it begs even more questions, doesn’t it? There are huge questions to what extent this is even permissible. SEC has issued guidance on what you have to do if you’re going to make material announcements on social media, and you have to telegraph it to the market that you intend to make an announcement on these platforms. It’s unclear whether he jumped through those hoops effectively. They do have some vocabulary in  which it says that they will make announcements via social media. I’m not sure if this entirely covers it. He did give himself wriggle room, he said, ‘We’re considering it.’ He didn’t say it’s definitely going to happen. But there’s certainly going to be a bunch of people at the SEC scratching their heads when they get into the office today to see if they need to take further action.

Was he just trying to stick it to the shorts?

That does remain a big question. He had said, I think a month or two ago that there’s huge news coming out, which will kill all the shorts. I wonder whether this was it? The thing that is puzzling though, there’s been some reporting from the FT saying that Tesla’s favourite investment banks knew nothing about this. This is not on their radar, so if it had been in the works for a couple of months, one might imagine they might have been in the loop. It typically has hurt some shorts and equally, in some ways, I wouldn’t be surprised if you see more short interests in Tesla. Of course, it’s gained even further, so there’s more to benefit from going down and there is a kind of ceiling now to how much they could lose. If this deal is going to go ahead and it’s going to be at $420. Well that means the most they can lose is 10%. If it doesn’t happen, then one anticipates the stock would tumble, so they’ve got a huge amount of upside in the form of $375 or whatever the valuation is right now. So it’s a mixed message for short investors.

Well, let us take Mr Musk at his word here and suggest that this is his plan. If he did take Tesla private, would that silence Tesla’s critics?

It wouldn’t silence them but it probably means that they have less volume. Ultimately, if people are willing to invest in Tesla, when they’re not publishing quarterly numbers, that is entirely their prerogative. If you can’t short – it’s harder to short a company if it’s not publicly traded. You can still have questions about it operationally, and they still have debt. They still have people to whom they owe significant amounts of money, so they’re not completely bereft of any public oversight. But it would go a long way to ensuring that they don’t have to worry about the more short-term targets clearly, quarterly numbers for instance.

Briefly, last question, here. I wonder when you can sort of turn a company on its head with a few tweeted words, does that suggest that Tesla should be private at this point?

Yes, that speaks very much to the issue with Tesla, is its volatility and Elon was complaining about the volatility in the blog post, which was also in the email that he had sent to Tesla employees. Well, he is the generator of much of that volatility. It’s all very well passing the buck onto investors but they’re reactive to what the company does or doesn’t do. Elon’s propensity to take to social media is a huge risk clearly, for investors.

That was Bloomberg’s Opinions Columnist, Alex Webb, speaking from London. How did it all go so wrong between Musk and Wall Street? On a day when investors in his stock should be celebrating a promise to give them a quick profit. Most, just don’t believe him. The Financial Times of London’s front-page lead story even mused that Musk might have been making a joke all along with the $420 a share number, and inside reference to April 20th, a day that’s celebrated by marijuana smokers. After all, over the past 15-years investors have injected billions of dollars into funding the Tesla dream. The company, which in all that time, has yet to make a profit. The relationship between Musk and his investors have been on a slide for a while, mainly because of missed forecasts but that slippery slope got a good oiling in May this year when Elon threw his toys during the official Tesla Earnings Conference call with analysts.

Question: So where specifically, will you be in terms of…

Elon Musk: “Next…boring. Bonehead questions are not cool. Next.”

So, in case you didn’t get it, Musk’s exact words were, “Next…boring. Bonehead questions are not cool. Next.” Given that Musk’s dreams have been funded through the investment of billions of dollars like the analysts of Bernstein & Co. you have to wonder who exactly the bonehead is but it gets even better. There’s a long pause in this clip as Elon probably switches his own microphone to mute.

Question: Thank you. Our next question comes from Joseph Spack with RBC Capital Markets.

Thank you. The first question is related to the Model 3 reservations and I was just wondering if you’d give us a gauge as to maybe some of the impact that the news has had. Of the reservations that actually opened and made available to configure, can you let us know what percentage have actually taken steps to configure?

Elon Musk: We’re going to go to YouTube. Sorry. These questions are so dry. They’re killing me.

Question: Thank you. Our next question is from Galileo Russell with Hyper Change.

And, for the next 20 minutes or so, Musk indulged himself as the deliciously-named YouTube vlogger Galileo Russell posed one sycophantic question after the other. It was enough to give pause to any investor but the pros did look beyond that public meltdown and they cared less when Musk belatedly apologised three months later. Among those who believe Musk’s biggest asset is his hype machine is Steve Eisman, one of the stars of Michael Lewis’ superb book The Big Short. Eisman was among the handful of Wall Street iconoclasts who saw through the collateralised debt option bubble – the thing that sparked the global financial crisis in 2008. This band of brothers sold CDO’s in huge volumes at a time when everybody else on Wall Street was inflating the bubble to its eventual and past the bursting point. So let’s get a reminder of what Eisman told the Bloomberg surveillance team last week when he was discussing Musk’s apparent cerebral advantages.

People who love Tesla, like to say he’s a genius. It’s been my experience over the years that there are a lot of smart people in this world but just because you’re smart, doesn’t mean you execute well and so far, he’s not executing well. He’s building a whole bunch of cars in a tent. He has negative cash flow. He’s at war with his safety regulator after the unfortunate crash for his autonomous driving car and he’s lost a tremendous number of executives over the last two years. Those are all negative signs. Maybe he can pull it out but as of now, it seems to me that all the fundamentals are pointing negatively.

And, there’s some really peculiar behaviour, elsewhere. Do you factor that in when you have to create a short thesis or is that separate to what you’re walking us through at the moment?”

I factor some of that in. I factor more in that after the autonomous driving accident, he announced two weeks later that he was no longer cooperating with the National Safety Board. I thought that was a very poor decision. The other stuff I listen to but I don’t pay that much attention to it.”

Fair enough but surely there’s some value there. Tesla has after all, established a lead in electric cars. Surely that’s going to rescue Musk’s reputation and his company’s future. “Not so fast”, says Eisman.

“I think that when you look at the car space, the real future is going to be autonomous driving. He’s gotten big in the electric car space but I really think that we’re leapfrogging now towards autonomous driving and the two largest players in autonomous driving are Google and GM. As far as I can tell, Tesla is a very distant party in that space”.

Well, the boy from Pretoria is certainly causing a ruckus in international financial markets but will his reputation survive intact? Time will tell. This has been The Rational Perspective. I’m Alec Hogg. Until the next time, cheerio.