If Elon Musk’s latest tweets are to be believed, you might soon not be able to purchase stock in Tesla. The tech titan announced yesterday that he has secured funding to take the company private, a radical move that would effectively remove the company from being publicly-listed, and give Musk significantly more control over decision-making within Tesla.
The tweet storm of sorts came just hours after a Financial Times exclusive that Saudi Arabia’s sovereign wealth fund had shored up stake of just under five percent in Tesla, worth roughly $2 billion.
“Am considering taking Tesla private at $420. Funding secured,” tweeted Musk on Tuesday afternoon.
"Being public 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," Musk said in a letter to employees hours later, explaining the decision.
Indeed, Musk has not always gotten along with short sellers and Wall Street analysts. He’s known for shunning earnings calls, and in fact called a question “boring” when he was asked by an analyst what Tesla’s Model 3 gross margins were — a legitimate question considering Tesla’s weak sales over the past few years.
“As a public company we are subject to wild swings in our stock price… 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,” wrote Musk. And he’s not necessarily wrong.
Tesla’s stock price has risen by an astounding 2000 percent since the car-maker went public eight years ago, but it still has not been able to reach profit territory. The company’s market value surpasses that of Ford and GM, despite the fact that the latter two companies have sold many more cars that Tesla has.
All this has led short sellers to perpetually speculate and trade on the notion that Tesla has little long-term value — they’re betting its share price is overvalued, and it might just collapse one day. And these speculative trades are exactly what Musk will be rid of if he manages to secure the funding to buy back all the publicly-traded shares of Tesla out there, shares that anyone is currently allowed to purchase.
But going private isn’t a simple task.
The first course of action for a company to abandon its public-listing is ensuring that it has enough money to buy back all of its shares. Tesla currently does not, so it would presumably have to resort to borrowing, or raising money through private equity financing.
In a typical scenario, a private equity firm would swoop in and conduct a leveraged buyout — purchasing a controlling share in the company, while current shareholders are incentivized to sell their stakes. For instance, Musk tweeted that he would take the company private at $420. That means that each share would now be worth $420, instead of the present price of roughly $375, so as to encourage investors to pull out and make a profit.
What’s strangely contradictory is that Musk appears to be encouraging current shareholders to maintain their stake in the company — and he himself has made it clear that he does not intend to sell his stake in Tesla, which calls into question how exactly Tesla would go about making itself private again.
Musk currently owns about 20 percent of Tesla, worth roughly $12.6 billion at Tesla’s current stock price. In order for Tesla to go private, Musk would have to shore up an additional US$70 billion, according to the calculations of Dwight Scott, president of private equity firm GSO Capital Partners.
The fact that Saudi Arabia’s sovereign wealth fund is heavily invested in Tesla is a clue that the fund is interested in owning a big chunk of Tesla, and might perhaps put up more money for the share buyback. But that has not been confirmed. Even Tesla’s board has not confirmed where the source of the funding would come from, saying only that Musk had “addressed the funding for this to occur.”
So far, investors are skeptical. “We think it would be extremely difficult -- bordering on impossible -- to believe that Tesla could raise significant amounts of debt in public markets,” Scott told Bloomberg.
“What does Musk mean by ‘funding secured?”’ Toni Sacconaghi, an analyst at investment firm quipped, in a Bloomberg News interview. “How could Tesla possibly fund such a large transaction?”
So what’s next? If Musk manages to prove to investors that he has the money to take the company private, he will then be subject to a shareholder vote — anyone who owns Tesla stock will ultimately get to decide if they want Tesla to go private, or continue to be subject to the risks — and rewards — of being a publicly-listed company.