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Sun 12 Aug 2018 07:09 AM

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Elon Musk's $82bn quest to silence his critics

Saudi investment helps the maverick owner contemplate delisting Tesla from the New York stock market

Elon Musk's $82bn quest to silence his critics
Tesla CEO Elon Musk.

The wild tweet hit Wall Street at precisely 12.48pm on Tuesday, August 7. And things just kept getting wilder for the stock from there.

Seemingly out of the blue, Elon Musk proclaimed that he might pull his money-losing Tesla Inc off the stock market, taking the electric-car company private at a price that would amount to an $82bn valuation – a monumental sum that left many investors wondering: Is this a joke?

It wasn’t.

Musk, the enfant terrible of Tesla and SpaceX, has defied the odds before. But last Tuesday’s gambit – unleashed in a series of tweets over the next two hours and 40 minutes – opened a new chapter in one of the most tempestuous business stories of our time.

Even fans seemed unsure whether Musk could pull this off – or, if he does, where that will leave Tesla. Only a week ago, the company with a seemingly unshakable base of firm believers and equally fierce legion of detractors recorded another huge loss after burning through hundreds of millions of dollars.

Investment environment

Indeed, Musk’s initial tweet, sent roughly half an hour after news emerged that Saudi Arabia’s sovereign wealth fund had built a stake in Tesla worth about $2bn, was the latest in a series of unusual manoeuvres that have thrust the executive into the public spotlight.

He’s made no secret that he has little patience for his naysayers. In a May conference call, the CEO blithely said that if investors were concerned about the volatility of Tesla’s stock, they shouldn’t own the shares.

“The reason for doing this is all about creating the environment for Tesla to operate best,” Musk, 47, wrote two weeks ago in an email to employees.

He said wild swings in the carmaker’s stock price are a “major distraction” to Tesla workers, who are all shareholders. And he said that being public “puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term”.

To take Tesla private, Musk would have to pull off the largest leveraged buyout in history, surpassing Texas electric utility TXU’s in 2007. And Tesla doesn’t fit the typical profile of a company that can raise tens of billions of dollars of debt to fund such a deal.

The carmaker has lost money on an operating basis every year since going public and has been burning through billions of dollars amid the struggle to iron out production issues with its Model 3 sedan. Neither Musk’s tweets nor his blog post make mention of how the company would pay for it.

Tesla surged 11 percent last Monday on the plan, closing at $379.57, or about 10 percent below the $420 a share Musk said he’d pay to take the company private, highlighting the doubts traders have about his ability to pull the deal off. The stock declined 0.6 percent at 10.58am last Monday on Frankfurt’s Tradegate before the US market open.

“The market doesn’t believe him,” said David Kudla, the CEO of Mainstay Capital Management, which is betting against Tesla. “His credibility has come into question over a number of things. If this were real, you’d expect the stock to go closer to $420 a share than it has.”

Most major buyouts also require a trip to the junk bond markets, where Tesla has fallen out of favour. Its inaugural offering of the notes last year fell below par almost immediately and never recovered. The bonds rallied last Tuesday, but at just 92.4 cents on the dollar, they too reflect investor scepticism. If the deal were to actually go through, creditors would reap – thanks to a clause in the bond contract – a price of 101 cents on the dollar.

“It is important to note that, as of today, no details have been provided with regards to what ‘Funding secured’ means,” Evercore ISI analyst George Galliers said in a note, referring to a statement from Musk. “Depending on where the private funding may come from, going private may provide Tesla with deeper pockets” from a strategic investor and freedom from the volatility of public markets.

Musk has a long history of bristling at the amount of scrutiny Tesla endures from investors and the media. In an interview with Bloomberg News in January 2015, he spoke of the benefits of running his closely held rocket company, Space Exploration Technologies Corp, and his frustrations with having taken Tesla public in June 2010.

“There’s a lot of noise that surrounds a public company and people are constantly commenting on the share price and value,” he said in 2015.

“Being public definitely increases the management overhead for any given enterprise,” he added.

Tesla tweet storm

How Elon Musk announced his plans for the company on social media

“Am considering taking Tesla private at $420. Funding secured.”
6.48pm, 7 Aug 2018

“My hope is *all* current investors remain with Tesla even if we’re private. Would create special purpose fund enabling anyone to stay with Tesla. Already do this with Fidelity’s SpaceX investment.”
8.00pm, 7 Aug 2018

“... Am super appreciative of Tesla shareholders. Will ensure their prosperity in any scenario.”
8.07pm, 7 Aug 2018

“Shareholders could either to sell at 420 or hold shares & go private.”
8.13pm, 7 Aug 2018

“Def no forced sales. Hope all shareholders remain. Will be way smoother & less disruptive as a private company. Ends negative propaganda from shorts.”
9.07pm, 7 Aug 2018

SpaceX model

Musk pointed to SpaceX as a model for how Tesla could be privately held. He said in a tweet his hope is that all current investors in the electric-car company would stick with it by buying into a “special purpose fund”, and said that this has been done through a Fidelity investment in the rocket manufacturer.

Taking Tesla private “makes a ton of sense” from Musk’s perspective, said Gene Munster, a managing partner at venture capital firm Loup Ventures. Though even he – one of Tesla’s biggest bulls – assigns long odds to the CEO pulling off this deal.

“Musk does not want to run a public company,” Munster said. “Our guess is there is a one in three chance he can actually pull this off.”

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