After processing Musk’s letter along with a number of other variables that have emerged, we believe there is a greater than 50% chance Tesla becomes a private company.

A privately held Tesla has a greater chance of succeeding than if it remains publically held.

While legal concerns about Musk’s use of “financing secured” could weigh on shares in the near-term. We do not believe he or the company are at legal risk.

Our best guess is it will take $25-$30B to take Tesla private.

We think there is a slight chance (10%) the $420 bid will be raised to satisfy current investors who would be unable to own Tesla privately.

Should Tesla be private?

The answer is yes for 2 reasons:

As a private company, Tesla would not be subjected to the intense, short-sighted scrutiny it is today. Instead, Tesla can make better decisions for the long-term success of the company. For example, what is best for Tesla may not be to produce 5,000 Model 3s per week, but to focus their efforts on continued improvement in automation and precision of the factory so that when the time comes, they can reliably produce 10,000 cars per week. In addition, Tesla’s cash balance, historically a topic where investors need handholding, could be more flexible, allowing them to invest more aggressively in things like charging and vehicle service infrastructure. In general, private investors have a higher threshold for risk, are more focused on the long-term story, and are a better fit for a company like Tesla. Tesla is one of the most highly-shorted stocks today (over 27%). While investors betting against the company and trying to damage its narrative are not problems unique to Tesla, in this case, they are particularly burdensome. This translates to both sides of the story magnifying any negative or positive development along the way, making it hard for believers and non-believers to stay level-headed. The real story of Tesla’s successes and blunders runs alongside the drama of “Elon vs. the shorts.” Removing the financial incentive to bet against Tesla will not only allow Musk and others to focus on operations rather than the company’s public perception, but it will allow the growth of the company to unfold naturally.

What would a deal look like?

While we now believe there is a greater than 50% chance Tesla becomes a private company, we recognize the mechanics of such a deal would be complex. Increasing this complexity is Elon’s interest in creating a special purpose vehicle for existing shareholders. Musk cited SpaceX and Fidelity’s current arrangement as a potential model, and there are similar investment vehicles for private companies like Uber. We will assume a “private Tesla” would include an SPV allowing current investors to convert their shares if they choose not to sell at $420. The price of an outright buyout may exceed $80B, but that is not likely, as it is reasonable to assume many current investors will continue to back the company instead of selling at what amounts to a 13.5% premium to the latest closing price. Insiders, including Musk, own just over 25% of Tesla shares. Individual investors account for 12% of shares, and large institutional investors like Fidelity and T. Rowe Price make up the remaining 63%. We believe nearly all investors would be supportive of going private, but not all institutional funds would be able to participate in private investments. For that reason, we assume half of Tesla’s institutional ownership (~30% of the company) needs to be bought out. Individual investors, who see greater upside than 13.5%, would likely prefer to maintain ownership if they are able to, depending on fund structure and accredited investor requirements. In short, the more shareholders that decide to roll their shares into the private entity, the less funding Tesla will need for a buyout. By our math, Tesla will need between $25 and $30B.

Where will the money come from?

This question is the most difficult hurdle. The money could potentially come from existing investors doubling down. Seeing a greater potential for Tesla to carry out its mission as a private company and several times upside to the current valuation, existing investors could increase their allocation. Other fundraising possibilities include strategic investors like cash-rich tech companies looking to make a play in EV and autonomy, foreign partners like the Saudi Sovereign Wealth Fund or the SoftBank Vision Fund (assuming CIFUS approval), or raising the debt themselves – less likely given Tesla is not a great candidate for more leverage.

Did Musk do anything wrong?

The short answer is we don’t think so. That said, this topic could weigh on shares in the near-term. In 2012, the SEC ruled that social media can be used to disclose material information as long as investors are aware and access is not limited in what’s known as the Reed Hasting’s Rule. Tesla disclosed that social media may be an outlet for disseminating company information in a 2013 8K. This, of course, assumes the tweets were truthful, but the language, “funding secured” is a vague statement that, although it implied funding is fully lined up, leaves a lot of room for legal interpretation. If Musk’s claims (which were responsible for an 11% jump in share price) were false, he could face repercussions, but based on further statements from Tesla and its board, that is unlikely.