During market hours on Tuesday Tesla’s CEO, Elon Musk, tweeted that he was, “considering taking Tesla private at $420. Funding secured.” From the initial indications this seems to be more of a fire first, aim later, from Musk’s iPhone (assuming he uses an iPhone vs. Android device) than a well thought through proposal which was reviewed by the Board. In a letter to employees, he has one very good reason for wanting to do this, but it also seems as much a reaction to not wanting to have to take questions from analysts and to hurt short sellers.
At 12:48 p.m. Eastern Time, Musk sent out the initial tweet that helped the stock take off from about $360 to close at just under $380, up 11% for the day. It has now fallen to $360 as the market has absorbed what it would take to pull this off.
At $360, this is just about where the stock was before a report that the Saudi Arabia’s Public Investment Fund had taken a 3% to 5% stake in the company and just a few minutes before his tweet, which popped the stock. The tweet had two major components to it: a $420 takeout price for the stock and funding to do this was secure.
How much does Musk have to come up with?
The initial estimate is that at a price of $420 and 170 million shares that it will “cost” $71.4 billion before Musk and anyone else keeping their shares is taken into account. However, there are at least two other components that may need to be financed or convince current shareholders to exchange stock in a private Tesla.
The first is the debt the company has. At the end of June, Tesla had $2.2 billion in cash and $7.7 billion in recourse debt (meaning it is backed by collateral). This adds $5.5 billion to the price since there are probably provisions in the loan agreements that the debt has to be paid when a company is taken private or a large amount of additional debt is raised. There is $3.2 billion in non-recourse debt, which I’m assuming does not come into play in Tesla going private.
The second is additional shares created by stock options and restricted stock becoming vested when there is a change of control of the company. If this is the case an additional 11.7 million shares will need to either be bought out or the holders exchange them in private company stock. At $420 per share, this adds $4.9 billion to the price.
How much in interest payments could this add?
While Musk said that funding is secured, there are no details and from many people who seem to be in the flow of information, there weren’t any discussions about obtaining a large amount of financing for this. Musk did tweet that shareholders would be able to hold onto their current shares in the new entity.
One huge challenge is Musk having to convince a very large percentage of current shareholders to take stock in a private Tesla or finding others willing to do so. However, with 64% of shares, or 108.8 million, held by institutions a large percentage of them will either sell since they think $420 is too good a price to pass up and reinvest the funds somewhere else or be forced to since they won’t be able to hold shares in a private company. This means that Musk may need to find upwards of $45.7 billion in funding for these shares.
To get a feeling for how much in additional interest payments Tesla may have in going private we can make some assumptions.
- All the shares owned by non-institutional shareholders exchange for private company stock (this is probably high but lessens the amount of debt needed)
- Of the 108.8 million held by institutions, half are exchanged or bought by organizations willing to hold them and half need to be bought out in cash
- At $420 and 54.4 million shares, Musk must raise $22.8 billion in debt
- Tesla’s August 2025 notes are rated B- by S&P, are in junk territory one notch above a CCC+ rating and have a 6.75% interest rate
- At best, if lenders can be found, the interest rate would be 7%
- The yearly interest payments would be $1.6 billion
This could push out until at least 2020, if not farther, when Tesla could generate positive free cash flow . And it does not take into account the billions that will be needed for additional plant sites. Unless Musk believes that the total price tag will be absorbed by equity holders, given the potential debt needed to pull this off, it is a bit surprising that one of his tweets said that investor support is confirmed and only a shareholder vote is needed.
Tesla bonds haven’t moved
One way to monitor Tesla’s financial health is to check out how its 5.3% debt due in August 2025 is trading. It was raised a year ago and has fallen over the past twelve months to where its imputed interest rate is around 6.75%. Over the past few days, they haven’t moved much, which either means fixed income investors either believe Musk could pull this off and not have an impact on the bonds (or at least over the next 7 years) or that his tweet was a bit random and going private won’t happen.
One very good reason for going private
In his letter to employees, Musk gives one very good reason for taking Tesla private. He is correct that the quarterly earnings cycle (which he has succumbed to, just look at the tent that was built to make Model 3 cars) can get management to make short-term decisions that are not the best ones in the long-term.
The other reasons he cites are minor ones; the swings in the stock price being a distraction and short sellers. Yes, the stock moving up and down can get employees talking but that shouldn’t have a major productivity impact. And it feels like Musk has gotten himself worked up about the short sellers more than he should.
More Info: www.forbes.com