Musk: Going private would ‘free’ Tesla

Keith Laing | Detroit News Washington Bureau

Tesla CEO Elon Musk touched off a rush in financial markets that drove his company’s stock price up nearly 11 percent with a Twitter announcement that he’s considering taking the Silicon Valley automaker private.

“Am considering taking Tesla private at $420. Funding secured,” Musk tweeted Tuesday afternoon.

“My hope is *all* current investors remain with Tesla even if we’re private,” Musk continued in a subsequent tweet. “Would create special purpose fund enabling anyone to stay with Tesla. Already do this with Fidelity’s SpaceX investment.”

The announcement resulted in a run on Tesla stock that led to a temporary suspension of trading of the company’s shares. Tesla shares climbed to $379 by market close Tuesday, up $37.58 – and boosted Musk’s personal wealth by $1.4 billion over the course of two hours.

Tuesday’s tweet came minutes after the Financial Times reported that Saudi Arabia’s sovereign wealth fund had built a stake in Tesla worth about $2 billion – less than 5 percent of the company’s value.

And it left many questions unanswered, namely how Musk – who owns almost 20 percent of the company – would be able to come up with the $66 billion necessary to complete the transaction. At $420 a share, Tesla would have a value of about $82 billion including debt. To take it private, the billionaire would have to pull off the largest leveraged buyout in history, surpassing Texas electric utility TXU’s in 2007.

Musk shared more of his thinking in a Tuesday afternoon email posted to the company’s blog. The mercurial CEO said no decisions have been finalized, “but the reason for doing this is all about creating the environment for Tesla to operate best.

“As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders,” Musk wrote. “Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. 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.”

Financial analysts were skeptical about the seriousness or viability of Musk’s latest plan.

David Kudla, CEO of Grand Blanc-based Mainstay Capital Management LLC, said Musk runs the risk of disappointing investors if he fails to deliver on the privatization plan.

“If there ends up being nothing to it, or there’s no deal to be done, then we’re back to the fundamentals of the company,” he said. “Now we have a stock that could be inflated to $400, a lot of air can come out of it.”

Kudla said Tesla’s financial performance would be difficult for any auto company to sustain long-term.

“It’s hard to believe a stock price near $300, even $200 is sustainable long-term, given the fundamentals of industry that they’re in,” he said. “You look down the road and it hard to see how he maintains the valuation that it looks like people are expecting.”

Musk’s musings about taking Tesla private came six days after the company posted a record $717-million loss in the second quarter of 2018. The company said then it is heading toward a profit for the first time by the end of year as it slows its cash burn.

The $739.5 million in cash Tesla burned in April through June was less than expected; analysts were expecting Tesla would spend about $900 million. It had gone through more than $1 billion in three of the previous four quarters.

Michelle Krebs, senior analyst for Autotrader, said she is taking a wait-and-see approach to Musk’s pronouncements about taking Tesla private.

“Let’s see if this is an empty tweet or if there is true intent behind it,” she said. “It is easy to see why Elon Musk would want Tesla to be a private company – less scrutiny and less pressure from media, analysts and stockholders.”

Rebecca Lindland, senior analyst at Kelley Blue Book, said Musk is likely “feeling the constraints of being publicly held traded” and drawn to “the concept of suddenly being private and not being beholden to Wall Street to those pesky boring analysts’ questions.”

She noted the peculiar $420-per-share target price – with 420 being code for marijuana use.

“Is it $420 stock because that’s code for cannabis or is that real?” she asked. “And just the fact that we have to wonder about that is kind of mind-boggling.”

Bloomberg New contributed.

klaing@detroitnews.com

(202) 662-8735

Twitter: @Keith_Laing