Tesla Plan To Go Private Ridiculed And Lauded.
Announcements By Tweet Likely To Incur SEC Wrath.
Supporters Demand Details About The Funding.
Assured Saudi Funding Turns Out To Mean Rather Less.
Tesla Inc stunned investors with its plan to go private and reactions ranged from disbelief to predictions of bankruptcy on one side to hopes the audacious electric car maker would finally start making money and thrive if it could only shake off the shackles of public share ownership.
News that Tesla planned to go private came in the form of a tweet from CEO Elon Musk. That move itself was a slap in the face of Securities and Exchange Commission regulators, who insist corporate market moving information must be released in a way that maximises the chance that investors have an equal chance to react. The Musk tweet said he wanted to go private at $420 a share, funding assured. Musk said as a public company it was subjected to wild swings in the share price, and attack from short-sellers. Critics immediately demanded to know more details.
A belated attempt days later by Musk to say a deal with Saudi Arabia was likely, only muddied the waters. Musk’s original tweet said funds for going private were “assured”, and that turned out to mean the Saudi Arabian sovereign-wealth fund and 5 per cent Tesla shareholder, might come up with funding. This adds up to more ammunition for SEC lawyers.
Fitch Solutions’ Automotive Research Briefing liked the going private idea but worried about how it could be funded.
“Some of the reasons Musk gave for wanting the company to be private echo our own long-held views. We have previously said that the company needs to achieve objectives such as quarterly production targets on a consistent basis over a long period if it is to prove it can be a volume manufacturer, rather than ramping up resources and implementing emergency measures to meet one quarter’s targets.”
“Similarly Musk wrote that taking the company private would enable it to operate ‘free from as much distraction and short-term thinking as possible’ – with distractions and short-term thinking being the need to perform for quarterly results and analyst calls, which can have a volatile impact on share prices,” Fitch Solutions said in a report..
“The biggest risk is financing the deal. Musk’s tweet indicated that the financing was secured. However, no party has come forward as an investor yet and given the company’s long-term debt burden of around $9.5 billion, which has seen its debt-to-equity ratio gradually climb over the last year, plus its well documented rate of cash burn, financing the deal with more debt would be difficult and risky,” Fitch Solutions said.
Berenberg Bank of Hamburg, Germany, liked the idea but said the offer price should be $500. Going private would remove Tesla from day to day examination and lift pressure on its development, and have wide-ranging implications for the rest of the automotive industry.
“It removes Tesla from the glare of the public market’s short-termism, allowing the company easier access to funding sources that are more aligned with Mr Musk’s longer term ambitions,” said Berenberg Bank analyst Alexander Haissl.
Going private would also make it a more difficult rival for traditional manufacturers.
“Firstly, the company will be much better placed to execute its expansion plans, such as in China and Europe, with potentially accelerated timeframes. That means Tesla competitors may have even less time to produce viable alternatives, or risk losing significant market share,” Haissl said.
Competition ganging up
Not everybody thinks Tesla will have its own way in the electric car world for much longer.
In July, PA Consulting said in a report Tesla’s leadership will end by 2021 as Mercedes-Benz claims the lead, followed by BMW, the Renault Alliance and Volkswagen. Tesla will only be in 7th place by 2021, also behind Volvo and Toyota, according to the report, which ranked electric automakers according to their strategy, battery technology, culture, supplier networks, partnerships and financial performance.
Wall Street Journal columnist James Mackintosh described the plan as “flawed” and a “slap in the face for shareholders”. The idea that Tesla has been held back by its public share ownership makes no sense to Mackintosh.
“It is hard to think of a company that cares less about sucking up to Wall Street than Tesla. Mr. Musk earlier this year rejected “boring bonehead questions” from analysts on his quarterly earnings call; the company offers no guidance on quarterly earnings; and it has frequently and unapologetically reported losses far worse than expected – only twice has it made a quarterly profit, both times a surprise,” Mackintosh said.
But investment researcher Jefferies liked the idea and said going private felt like the right thing to do.
“Distraction or not, the move feels right even if Musk is downplaying how supportive public markets have been,” Jefferies analyst Philippe Houchois said.
Berenberg Bank’s Haissl sees big long-term benefits to Tesla.
“Under private ownership, an acceleration of expansion plans could unlock Tesla’s full potential value much earlier than anticipated,” Haissl said.
The harshest criticism came from hedge funds who have long predicted doom for Tesla.
Hedge fund manager Mark Spiegel of Stanphyl Capital said nobody believed Musk could raise the funding to go private, and told the Financial Times Tesla probably would go bankrupt.
“There’s one million reasons to short Tesla shares. You can start with the fact that the company just posted its largest net loss in history and that, if the CEO is serious about going private at $420 per share, the upside is now tapped and the risk is all on the downside,” Christopher Irons of Quoth the Raven Research told the FT.
Either way, according to Morgan Stanley, early action is required.
“The longer this situation with no additional details or direction persists, we see reasonable risk that the underlying business could suffer some damage. With that in mind, we see the status quo as clearly unsustainable with an urgent need for some resolution of the path forward,” Morgan Stanley analyst Adam Jonas said.