Musk’s dream of taking Tesla private bumps up against reality
The quarterly earnings cycle “puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term”, he complained in the message to his staff on Tuesday.
He added that wild share price swings were distracting to employees who own stock, and “finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company”.
The email followed tweets earlier in the day when he revealed he was considering launching a buyout of the electric car company he founded 15 years ago, at a share price that would value the company at $82bn including debt. While the communications raised more questions than answers, Mr Musk was quickly able to count on some Tesla shareholders to agree with his diagnosis of the problem with public markets.
“I can certainly see the logic behind it,” said Hamish Chamberlayne, a long-term Tesla shareholder who holds the stock in his $1bn Global Sustainable Equity fund at Janus Henderson. “The public capital markets are at risk of becoming a threat to Tesla’s progress, for several reasons,” he told the Financial Times. “We believe the long-term value of the company is much higher, so we would likely want to remain shareholders.”
Ross Gerber, founder and chief executive of wealth manager Gerber Kawasaki and another prolific defender of the business against its critics, told the FT he would not sell his stake, since he estimates Tesla is worth $95bn, or $571 a share, rather than the $420 a share proposed by Mr Musk.
The Tesla boss claimed he had “financing secured” for his buyout, but also tweeted that he wanted many existing shareholders to stick with the company after it goes private. How much money he has secured, in what form and from where, was a mystery — one which plaintiffs’ lawyers and potentially regulators will want to examine if he does not declare his hand soon.
How much money he will need, if many shareholders do indeed want to stick with him as a public company, is also an open question.
While Tesla’s three largest institutional investors — T Rowe Price, Fidelity and Baillie Gifford — account for a quarter of the shares, and Mr Musk holds just shy of 20 per cent, the shareholder register is also stuffed with index funds that will be required to sell.
The proportion of investors who do not want to, or cannot, hold private shares means Mr Musk must raise tens of billions of dollars, said Philippe Houchois, an auto industry analyst at Jefferies. That could be more than almost every leveraged buyout ever done — tough for a company that does not generate positive cash flow.
Responding to a suggestion on Twitter that he was following PC pioneer Michael Dell in taking his company private in order to save “a lot of headaches” associated with the public markets, Mr Musk tweeted: “Yes.”
The proposed Tesla buyout, however, would be the polar opposite of the two deals that Mr Dell used to build the biggest private tech company — the $25bn buyout of his PC maker and $67bn purchase of EMC.
Those deals were funded with a mountain of debt, backed by the solid cash flow from Dell and EMC’s mature line of PCs, storage devices and other hardware. The massive leverage has enabled Mr Dell to convert his small holding into a majority stake in the company, in preparation for a planned return to the stock market in the coming months.
By contrast, Tesla has been burning through cash as it builds up production of the Model 3, its first attempt at a mass-market car, leaving it with little flexibility to take on much debt.
Goldman Sachs has estimated that Tesla — which has been burning close to $1bn of cash every quarter — needs to raise $10bn to fund its future pipeline and ventures.