Elon Musk Says Working With Goldman Sachs, Silver Lake To Take Tesla Private

by Ike Obudulu Posted on August 14th, 2018

“I’m excited to work with Silver Lake and Goldman Sachs as financial advisors, plus Wachtell, Lipton, Rosen & Katz and Munger, Tolles & Olson as legal advisors, on the proposal to take Tesla private”, Tesla Inc CEO, Elon Musk, announced on Twitter on Monday.

On Monday evening, Mr. Musk took to Twitter again. Signaling that he remained serious about pursuing the potential buyout.

The chief executive of the electric car company said earlier on Monday that the manager of Saudi Arabia’s sovereign wealth fund had voiced support for the company going private several times, including as recently as two weeks ago, but also said that talks continue with the fund and other investors.

Musk said he is also working on figuring out what share of investors will likely roll their stake into a new private company, and by extension exactly how much capital he needs to buy remaining investors out.

The pursuit of a buyout has come at a crucial time for the company, as it struggles to turn out its first mass-market automobile, the Model 3. Tesla has taken on a mounting debt load and has yet to turn an annual profit. And while Mr. Musk has always been synonymous with the brand, he has never been under greater scrutiny.

In the past few months, he has mocked industry analysts for asking “bonehead” questions, pursued online tirades against investors betting against the company’s stock, clashed with a government agency investigating a fatal Tesla crash, and accused a disgruntled employee of sabotage.

Then he suddenly announced the idea of taking the company private.

Musk shocked markets last week with the tweeted announcement that he was considering taking Tesla private for $420 a share, a price that valued Tesla at more than $70 billion, and that he had “funding secured.”

In his blog post on Monday, Mr. Musk said he had notified the Tesla board on Aug. 2, five days before sending out the tweets, that “in my personal capacity, I wanted to take Tesla private at $420 a per share.”

He said that after the board’s outside directors discussed the matter — without the participation of Mr. Musk or his brother, Kimbal Musk, also a board member — the full board agreed to have Mr. Musk discuss the matter with some of the company’s largest shareholders.

Since then, Mr. Musk said, he had stayed in contact with representatives of the Saudi fund, which recently bought a stake of almost 5 percent in Tesla, and had been in touch with other investors.

A Tesla spokesman declined to comment beyond the blog post.

Tesla shares declined on Monday morning, then recovered in the afternoon to end the day 0.3 percent higher at $356.41. It was a far cry from the volatility of last Tuesday, when trading was halted in the confusion that followed Mr. Musk’s initial tweet, eventually closing 11 percent higher on the day.

The Nasdaq exchange, like the rest of Wall Street, seemed to have been stunned by the news. Companies that list on Nasdaq are required to inform the exchange’s market surveillance group at least 10 minutes before the release of news that could have a major effect on shares.

After Mr. Musk’s tweet, however, frenzied trading went on for more than an hour before it was halted pending a fuller announcement from Tesla, which came a half-hour before the market closed.

“As an officer of a public company that was a clearly a market-moving event and he knew or should have known that,” said Laura Unger, a former S.E.C. commissioner, said of Mr. Musk’s initial tweet. “He was at least reckless whether he meant to drive up the price or not. What it does point out is that executives and people in power should be thoughtful about what they tweet. The stakes are high.”

Aside from the scrutiny of market regulators, the frantic Tesla trading after the “funding secured” tweet has also exposed Mr. Musk to shareholder lawsuits. At least two law firms initiated potential class-action lawsuits late last week, saying the Tesla chief had deliberately acted to move the company’s share price without actually having funding in place. Such suits rarely go to trial; more often they are settled.

John Reed Stark, a former longtime lawyer at the S.E.C. who specialized in investigating internet fraud cases, said that commenting online about the prospects of taking the company private was inadvisable at best. But he said that a case of market manipulation would come down to Mr. Musk’s intent.

“These are very difficult cases to prove,” said Mr. Stark, who runs a cybersecurity consulting business.

As it scrambles to ramp up production of the Model 3, Tesla continues to burn cash. Looming in the months ahead are two key bond payments — one in November for $230 million and another early next year for $920 million that analysts believe will be harder for Tesla to make.

The recent rise in Tesla’s stock could make a difference; the company can pay off the second convertible bond with stock rather than cash if its share price is above $360.

Amid all the tension, Tesla has become a target of short sellers — investors who are betting the company’s stock will fall. Mr. Musk has opened feuded with short sellers on Twitter, taunting them when Tesla shares rise and accusing them of spreading negative news to hurt the company.

Shares of Tesla have one of the highest short-interest ratios in the United States stock market — that is, the most investor money betting against the stock, as a percentage of shares available for trading. So when shares rise, as they did after Mr. Musk’s tweet last week, it can cost the skeptics dearly.

EARLIER : Elon Musk Says Wants To Take Tesla Private, Shares Soar

Tesla Inc CEO, Elon Musk, announced on Twitter on Tuesday that he was considering taking Tesla private for $420 per share, or $72 billion (£55.65 billion), in what would be the biggest deal of this kind. He said the funding for the deal was secured, but did not provide details. Tesla shares ended up 11 percent at $379.57, indicating investors gave some credence to the plan.

The company’s stock halted trading for 90 minutes before an official statement was announced.

“First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best,” said Musk in the statement.

The CEO also explained several of the constraints he faced when running Tesla as a public company.

“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,” he said.

“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,” he added.

Tesla is also the most shorted stock in history, which exposes it to attacks from large number of investors, Musk said.

He added in a tweet after the statement that investor support for the plan “is confirmed,” and that the only reason the decision is not certain yet is that it would be contingent on a shareholder vote.

Shares of Tesla soared 10.99 percent to close at 379.57 US dollars per share on Tuesday.

Listed in 2010, Tesla’s current market value is 64 billion US dollars. At a share price of 420 US dollars, the company would be worth 71 billion US dollars.

Finding equity partners and bank financing is key to take-private deals. When Michael Dell took his eponymous computer maker private for $24.9 billion in 2013, for example, he brought in buyout firm Silver Lake that contributed $1.4 billion in equity, raised more than $10 billion in bank debt, and received a $2 billion loan from Microsoft Corp.

When a Twitter user commented on Musk’s proposed deal by posting “Just like Dell did. It saves a lot of headaches”, Musk responded by tweeting “Yes”.

Dell’s take-private deal, however, may not be possible to replicate with Tesla, which has a $10.9 billion debt pile, is losing money, and whose bonds are rated junk by credit ratings agencies. Without the ability to add more debt, Musk may have to turn to sources of capital that are less accustomed to using debt to juice returns in the way private equity firms are.

Musk has said he would be looking to keep his ownership of Tesla at around 20 percent and that a special purpose vehicle, like the one that exists at his aerospace company SpaceX, would allow Tesla shareholders to remain invested if they so choose, and then cash out when they wanted.

But sources familiar with SpaceX told Reuters it is not clear how Musk would apply it to Tesla. Fidelity Investments, the major backer of SpaceX, did not invest in it through a special purpose vehicle, according to the sources.

SpaceX only has a limited number of shareholders, who often choose to sell on their shares in the private market.

By contrast, allowing thousands of Tesla shareholders to remain invested through a special purpose vehicle would essentially mean that shares in that new vehicle are publicly traded in some way.

Even if such a deal was cobbled together, it is not clear whether so-called “liquidity events”, that Musk said he organises at SpaceX every six months, would be sufficient for all existing Tesla investors to cash out.

Many attempts by founders and top executives to take their companies private have never come to fruition. In March, Qualcomm Inc Chairman Paul Jacobs stepped down from the board to pursue a long-shot take-private bid for the U.S. chip maker, which has a market capitalization of $93 billion. To date, this bid has not materialized.

U.S. department store operator Nordstrom Inc attempt to go private also failed earlier this year, after banks balked at providing the necessary financing to the founding family members seeking to put together the deal.

Meanwhile, Tesla has started hiring for its new Shanghai factory, according to job postings on its website, just a month after the U.S. electric vehicle maker signed agreements with local authorities for the $2 billion project.

The automaker’s website showed it is looking to fill 14 roles including architectural designer and senior finance manager. Most of the positions are senior in level and require at least six years’ experience, the job descriptions showed.

Tesla did not respond to Reuters’ requests for comment. The Herald newspaper, which reported the job postings on Tuesday, said Tesla began advertising the roles on Sunday.

Tesla last month signed agreements with Shanghai authorities to build its first factory outside the United States, which would double the size of the EV maker’s global manufacturing.

Chief Executive Elon Musk on an earnings call this month said the factory would cost around $2 billion and that the EV maker planned to fund the project with local debt.

Tesla has said it wants to produce the first cars at the plant about two years after construction begins, reaching as many as 500,000 vehicles a year about two to three years later.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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