LONDON — Pretoria-raised super entrepreneur Elon Musk is a global personality on whom there is no middle ground. His disruptive approach is now challenging long- held stock market rules on the disclosure of share price sensitive information. An unprecedented “going private by tweet” has sparked an investigation by the SEC, delighted fans and emboldened short sellers – further polarising the divisive opinions about the CEO of Tesla. What’s certain, though, is this time he will be exposed as an ambitious huckster with an overworked hype machine – or, as his supporters claim, will finally be recognised for his unmatched genius. – Chris Bateman
This is The Rational Perspective, I’m Alec Hogg. In this episode the manipulative Musk Tweet – Brilliance or Blunder. The full transcript of this and every episode of The Rational Perspective is available, along with full access to The Wall Street Journal in the Premium Section of BizNews.com.
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In the 30 years since he left the relative backwater of his native SA, Elon Musk has come to personify the American dream. The brilliant entrepreneurial immigrant transformed from pauper to billionaire through hard work and ingenuity. Musk has attracted fame and fortune through a series of audacious business adventures, always doubling up, risking his millions, and billions on something still bigger. He’s come close to being wiped out on a number of occasions, most famously when he bet heavily on a fourth SpaceX rocket, after the first three had flopped. That time he won, but after an unprecedented takeover offer by tweet this week his critics believe that this time the boy from Pretoria has finally over-reached. But first, let’s recap. Here’s how Bloomberg Daybreak reported the story this morning.
Tesla shares are down 1.3% this morning. The Securities Exchange Commission is said to be investigating this weeks tweet from Elon Musk. Bloomberg’s Jon Tucker is live with the latest, good morning?
Good morning, Bob. According to The Wall Street Journal regulators have asked Tesla if what Musk tweeted was factual, and why such a disclosure was made via social media rather than through stock exchange filing? Musk vowed on Twitter that he had funding secured for a spectacular $82bn deal to take Tesla private. It sent the shares of the company soaring initially. So far Musk has offered no evidence to backup the statement. David Rubenstein, co-founder of the Carlyle Group has taken numerous companies private. He’s never seen anything like this.
Well, the board obviously has to retain an independent set of advisors because if the CEO of a publicly traded company is leading a buyout, you have some potential conflict.
According to a statement from six of Tesla’s nine directors that came out yesterday, Musk raised the go-private possibility with the board last week. They say, he had addressed the funding for this to occur without providing details.
That clip from Carlyle, co-founder and co-chairman, David Rubenstein was drawn from a discussion he had with veteran journalist Tom Keene and Pimm Fox of Bloomberg. Let’s listen in.
David, these are delicate matters but on this historic day we must ask you, first of all, about if you and Carlyle have any relationships with Tesla? We don’t want to step on those, but it’s an absolutely original morning, David, in my career to see the headlines come across.
I am familiar with it but I do not have a relationship with the company. I saw it. I think it would be an incredible buyout at $70bn or so. That would be the largest buyout ever done, a pure buyout, but we’ll see what happens.
We’ll see what happens but there has to be a relationship with a 20% owning principle, entrepreneur if you will, and his board. How would you advise the board on a proper action, giving all the transactions across David Rubenstein’s career?
Well, the board obviously, has to retain an independent set of advisors because if the CEO of a publicly traded company is leading a buyout, you have some potential conflicts. So, you’d have to make certain that there’s no other offer that would come along from somebody other than the CEO, and if the CEO is going to lead it, the board would have to make certain that everything is done fairly so that it’s not to the advantage of the CEO.
David Rubenstein, as someone that has an extensive list of experience with companies going public, going private, and the operations of various companies. If one of your portfolios companies’ CEOs, who maybe had a fifth of a company, came out with a Twitter tweet about a potential buyout at a specific price, during market hours, what would be your first call?
It would be unusual to think that would happen. I haven’t had that experience. Carlyle’s had 100s of companies we’ve owned and we’ve never seen something like that, but Mr Musk is an unusual person. He’s done some things that people didn’t think could be done before, including creating Tesla from nothing…
Right, but what would you do?
Well, I would handle it in a way that would be private. I probably wouldn’t publicly say what I would do.
So even the heaviest of Wall Street heavyweights caution that Elon Musk is one of a kind, and that he might be up to something that lesser mortals don’t just get yet. His fans certainly haven’t lost their adoration, but the critics are more certain than ever that he’s a charlatan.
Well, a lot of eyes were off the road yesterday and all on Tesla, as Elon Musk set the markets aflame, shall we say, with a plan, potentially, to take Tesla private. We’ve got to make some more sense of this and to do that we have Cathy Wood, she’s the CEO and chief investment officer at ARK Invest, at $6.5bn, she’s here with us in our Bloomberg Studio in Manhattan. We also have David Kudla, CEO and chief investment strategist from Mainstay Capital Management, they have more than $2bn under management, and he joins us on the phone from Michigan. So, Cathy, let’s start with you. What was your reaction to this yesterday?
Well, given our research and how undervalued we think the stock is right now. The stock today is in the $370 range. We think it’s worth today if this is our bull case, we think it’s worth $2,000 today, if Tesla is successful in rolling out an autonomous taxi network, not even in China. We’re not even including China in this calculation because it will move from a hardware manufacturer, with 20% gross margins, to a software as a service, a provider of transportation as a service with 80%-plus growth margins, and we think that it’s not only going to continue to do very well in the electric vehicle space. But that investors really have to understand this is not just an auto company. This is a software and a technology company.
So Carol I think we have our bull.
Yes, and Cathy that’s a long-term perspective?
No, actually, this is the bull case though, our 5-year price target is $4,000. Discount that, using a 15% discount rate that would bring us to $2,000 today.
Oh, $2,000 today, okay.
So, it’s highly undervalued. It’s ironic but we call ourselves, if you give us a long enough time horizon, a deep value investor.
David Kudla, come on in on this. You’ve been shorting this name, Tesla.
Yes, we have. We’re shorting yesterday between 03h45 and 16h00, and shorting again today. So we see it differently. We do see a car company, currently about 90% of the revenues come from manufacturing and selling cars. A company that’s now been around for 10-years, and no longer a startup. As far as the transition to a software company or everything in the future, whether it’s EVs, autonomous, robo-taxis, ride sharing, whatever it may be. We keep stressing this, Tesla doesn’t own the future. They just don’t own the future. Look at electric vehicles – Honda is buying their Next Generation battery modules from General Motors, a Japanese company buying their Next Generation electric vehicle battery modules from General Motors, they’ve already struck that deal. China is going to be very active. They’ve made it a national priority to be a leader in electric vehicles. The leader to be recognised is the leader of autonomous is Weibo. So there is no proprietary technology that Elon Musk or Tesla has. It is going to be a very crowded space, whether you’re talking about vehicles, the ride sharing, autonomous technology and there’s going to be a lot of competition so, we just don’t see it. I don’t see it the way Cathy does.
Right, and Cathy we’ve done here, at Bloomberg a lot of stories about what Tesla did was really kind of wake-up everybody, when it came to the electric vehicle market, and everybody was a bit sleepy, so they kind of had the first mover advantage. But now you see pick your automaker, whether it’s Mercedes, at the higher end as well, becoming much more aggressive about this market.
Yes, and we’ve had to face this question for quite some time, and we do, because we focus only on disruptive innovation. We focus on that all the time. There’s old DNA, and there’s new DNA. These auto manufacturers came out of the hardware world and they have great hardware engineers. What they need are software engineers. Tesla is already there. Software engineers are in short supply, so we think they have a competitive advantage. But just to focus on a few things that David said. ‘EVs they don’t own the market.’ They’re actually doing quite a very good job. In July they announced that they had 52% share of the luxury sedan market, over half so, others are coming out with EVs and they are continuing… That’s an increase in share. They also told us that their biggest trade-ins for the Model 3 over the last 6 months have been the Prius, the Leaf, as well as the Honda Civic, which was the biggest surprise to us. They’re expanding the market, the luxury sedan market, people who would never have bought this kind of car before. In terms of competitive advantage, they absolutely do have competitive advantage. Their battery, according to our estimates and our research, is 2 to 3, and our director of research would say 4-years ahead of anyone else. You can think about this in terms of cobalt, they way they’re adding silicon onto the air-node. They are being very creative and that’s not even considering the marvel that their battery pack system, which lines the bottom of the cars. No one else is doing it that way.
So, David, I only have about 30 seconds left, but I have to ask you, how much of your short is about the company, and how much of it is about Elon Musk?
It’s about fundamentals for the company. I think that Cathy is right, Elon Musk has been a disruptor. You’ve got to admire the mission of saving the planet, moving to sustainable energy, and moving the industry in that direction. In terms of the engineers, there is a [legacy? 0:11:29.0] business in Detroit and in other traditional automakers that is extremely profitable. That Elon Musk and Tesla don’t have to fund the next generation of flexible mobility and that’s where GM and other car makers have that, and they do have great engineers, Cathy. I know them. They’ve got great engineers. They are going to beat Tesla.
Here to help us understand this more and get his reaction is Gordon Johnson, he’s MD of Alternative Energy Metals and Mining, as well as equipment analyst for Vertical Group, and Gordon, just to underscore, he has already a sell recommendation on Tesla, with a price target of $93.00. Shares of Tesla currently trade at $376. Gordon, always a pleasure to hear what you’ve got to say. What was your reaction when you saw or learnt about the Tweet from Elon Musk?
Well, I’ve got to tell you, Tim, and thanks for having me on. Initially, it was sheer excitement because it seems to me like this was the nail in the coffin. You’ve got to think about this, right. Let’s just take a step back. Just a few days ago Elon Musk promised that they’re going to be profitable forever, starting in year 3 so, why would he need to go private, and earn negative propaganda from the short? If they’re going to be profitable forever, and he’s saying he’s going to go private at $420.00, the short covering alone would drive the stock to $500.00. You’ve got to think about all the dynamics regarding an LBO. First and foremost, if you’re a leveraged buyout investor what you’re looking for most is EBITDA, or money generated from the company to pay the interest on your debt and ultimately the debt, and we know that that’s not what this company does. We know that they’ve rebuffed an investment offer from Saudi Arabia. So, if you’re passing the hat for the largest LBO syndicate in history, why would you say no to a big cheque? It just doesn’t make any sense and when you think about the fact, this could be a $70bn or $80bn deal, and that it’s choreographed. The legal risk for any party involved would be significant. So, you’re talking about multiple borrowers that would need to be involved. Multiple investment banks that would need to be involved. We’ve heard nothing from any of these Tesla financiers or lawyers regarding a potential LBO, and just today the board members were saying they just started talking about this last week. Listen, here’s the thing, the question is, if the SCC does their investigation or if they investigate and they decide there’s wrongdoing here. Will Tesla investors care? If Elon Musk broke laws here, will they care? Probably not but I think the bigger problem is, if there’s no real offer out there, if Elon Musk can’t, over the next few weeks, show that there’s a real offer out there, I think he’ll have serious problems with respect to his current investors, and credibility and I think that’s the real problem. When you’re thinking about, even if Elon Musk rolls his shares and that the employees roll their shares, you’re still talking about $50bn plus in capital that needs to be raised. You have two current investigations alleging fraud for both SolarCity and with the number of models that he’s produced. You have a number of other potential issues underpinning this company, with respect to a potential SEC notice that may be out there. I know that people have said that’s not the case but if you listen to the question on the call, the man that asked the question did not ask Tesla ‘do they have a SEC notice?’ He said, ‘Do you have something that will include you from raising capital, which is not the definition of an SEC notice. This just seems, quite frankly, ludicrous and that was our reaction yesterday.
Okay, is there a way that you can see Elon Musk actually completing a deal like this? Set aside, for just a minute, your scepticism on a technical basis, is this a deal that is just too big to get done or is it possible?
That’s a great question, Tim, but I don’t even think it’s about the size of the deal. Again, think about this. A leveraged buyout is based on a company generating cash so, if you’re an LBO investor, you effectively take debt in a company to take the company over. With the prospect being, they’re going to generate cash to pay you back for that debt, or pay you back your interest and then pay you back for that debt. When has Tesla generated EBITDA? Never so, why, as an LBO investor would you be willing to go out on a limb and risk potentially a huge default in wasting your money? It just doesn’t make any logical sense and I think that investors and the public and quite frankly, SCC needs to see this actual money that he says he has secured. Those two words, money and secured – I think they need to be proven out over the next days or weeks, and we’re highly sceptical that’s going to be the case. It’s like a very general question. Is there enough money out there to do this? Yes, but does it make sense? Absolutely not. Will that LBO investors scrutinise deals much more than equity short sellers do and I think that’s what’s gotten lost in a lot of this story.
We’re getting the picture now and it’s complicated, like seemingly everything else in Elon Musk’s life so, who better to explain it all than Bloomberg’s Jonathan Ferro, with a little help from some friends.
This is how it typically works. A company, a CEO, and the board will get together and they’d talk about what to do in the future. Maybe they’ll think about going private. They’ll have that discussion, and then maybe they’ll think about disclosing that conversation to the general public, and they do that through a statement. Then perhaps the CEO, if he likes social media, will go on and Tweet about it. That’s typically how things work. With Tesla, it’s kinda like back to front. The CEO starts Tweeting about it. Then they put a blog post out about it, and then the board come out and say, oh, yeah, we talked about it just the other week. Now, Tesla is saying the board had met several times over the last week actually. They also say this discussion included talks on funding. However, both the board and the CEO of course, have a long way to go to convince many investors that this is going to happen or that it’s even credible. To discuss, I’m pleased to say, that Joel Levington is with us now, director of Fixed Income Research at Bloomberg, and Lananh Nguyen, Bloomberg FX Bond reporter joining us as well. Now, Joel, I want to get into the credit side of things with you. Let’s just say that a CEO has an incentive to juice the stock. Talk to me about convertibles and the relationship between the convertible notes of Tesla and the equity price, and the kind of levels that are important here?
Sure, well Tesla has a wide variety of convertible bonds that are outstanding. Many of which convert at about $360, and yesterday, post the news and still holding up today, even though the stock is down a little bit – those bonds went from being non-convertible, meaning they would have to refinance it in debt, to convertible where they could be converted in equity and therefore they would not need the liquidity.There’s about $3.3bn worth of those bonds that converted yesterday.
So, Elon Musk could basically, clear a lot of the debt if the stock price gets to a certain level?
Yes, a lot of investors have been concerned about 2019, where they have $1.5bn of debt coming due, which is really to convert. One of them is $920m that comes up in March, and that is one that went into the money yesterday, tipping over at $358/$359 price.
So, just to be clear here for our audience, if they’re not familiar with these particular securities. Do you have to wait until the Spring of 2019, before you can actually execute, if you hold these notes?
Well, you can buy and sell them today, but converting them into equity would happen when they mature.
On that maturity date?
Yes, 1st March.
The other issue, and you and I have gone back and forth on it, and I know there’s a lot of technical jargon in there so, let’s explore some of it. There is a 2025 note from Tesla, the much talked about 2025 note because when it was issued last August, for this maturity at this duration, and at this credit rating, it had a record low yield. It also had a covenant in it, a change of control covenant, which is quite important if you’re going to take the company private and you could possibly have a change of control. Walk me through what it could mean for that particular security, Joel.
Sure, well the change in control is in a lot of bonds that are outstanding, which gives a bond holder some sort of recourse. Now, in the case of Tesla, there is the 101 change of control, meaning you could put it back to the company if an event occurred. But included in that event requires one, single owner owning at least 50% of Tesla on the backside. In this case, when or if it goes private. As Elon Musk was giving us yesterday, that will not happen so, this bond will remain outstanding, which is why the bond, while it moved up initially when he was saying, he was taking it private, has come back down a little bit, and is nowhere the 101-conversion price.
So, basically, if the company is going to go private the upside is really, in the convertibles and in the equity?
That’s exactly right.
Lananh, you and your thoughts on what has been a crazy 24 hours for this company. I’m calling it the most polarising company on the planet. Would you agree with that?
It’s pretty polarising and I was sitting in the squawk desk yesterday and I could not keep up with the headlines or the share price so, macro investors obviously, anyone who is trading equities, but also just people in general are very attracted to watching the headlines on this firm. So, I was squawking one thing and then another thing came up, and it just kept going. So, it was pretty relentless yesterday, and the shares were moving like crazy.
Yes, what we’re trying to work out, Lananh, and I’m very careful to use words like fraud and price manipulation, on a program like this and I think as an institution here at Bloomberg, we’re incredibly careful about not throwing those words around lightly. But those words have been part of the conversation so, we should explore them. How difficult is it to prove the motive was to manipulate the price of the stock, with a Tweet like the one we got yesterday?
Well, I think the lawyers are probably on it and thinking about it right now because when it comes to publicly traded companies, there are a lot of protocols that you have to follow, a lot of things that you have to file, and paperwork that needs to be properly processed before these types of announcements happen so, he may get some questions. He’s certainly getting questions from the public sphere.
And from the short sellers I imagine as well, who got severely burnt by the move yesterday. The other thing outside of manipulation is to explore fraud. He said, ‘we had funding secured.’ A lot of people are asking whether the funding is secured. I spoke to Gene Munster from Loup Ventures and Gene said that term that was used on Twitter, is vague for him to get away with it because how much funding did he have secured? Was it just one conversation with one investor? In that way, maybe he had a little bit of funding secured. Did he mean all funding secured? So, it’s a very kind of grey area but never the less, I would just say that the bears feel even more vindicated by this, and the bulls have a new target price of $420 and they feel vindicated as well.
And that pretty much sums it all up. Pretoria raised, super entrepreneur Elon Musk, a global personality on no middle ground. A man, who’s disruptive tenancies are now challenging long-held rules and regulations around mergers and acquisitions. Whether investors love or hate him, they certainly can’t ignore him.
This has been The Rational Perspective. I’m Alec Hogg, and do remember that the full transcript of this and every episode of The Rational Perspective is available, along with full access to The Wall Street Journal in the Premium Section of BizNews.com – go and have a look. Until the next time, cheerio.
