The always-entertaining story that is Tesla (NASDAQ:TSLA) took another turn on Tuesday. Tesla reportedly is considering going private. Tesla stock gained 11% on the day.
The consideration of a buyout — initially released through CEO Elon Musk’s Twitter account — raised a number of questions.
Was the original Tweet a violation of SEC regulations? How would such a buyout work — particularly with Musk insisting that current shareholders could keep their TSLA stock? From where is the funding coming? And at what point — and how serious — are these discussions?
Of course the most important question is: Is this good news for Tesla stockholders? Admittedly, more information is needed to answer that question with certainty. But right now, the answer appears to be “no.”
A $420 Buyout Isn’t Great News
There are a number of problems for Tesla shareholders — particularly individual investors — in a buyout scenario. The first is that with the stock at $352, the upside to TSLA stock is starting to look possibly capped.
A confirmed buyout at $420 wouldn’t move Tesla stock to $420, after all. The market will discount the time required to close. Something closer to $415 would seem likely, which means Tesla stock only has about 18% more upside before hitting the buyout price.
That’s not the upside Tesla shareholders seem to want. And it’s not a level of upside which compensates for owning a still-risky and still-leveraged company that only now is targeting positive free cash flow.
Certainly, 18% upside is nothing to sneeze at. But it’s not what many TSLA bulls — fond of throwing out price targets of $500 or $1,000, if not more — were looking for. This is a company that is supposed to revolutionize the world. That’s not worth giving up to make a few bucks.
Of course, Tesla could be bought out at a higher price. The discussions of a $420 bid could be a plan to put Tesla stock “in play,” and certainly a higher bidder could come along.
But that seems highly unlikely. A go-private at $420 would easily be the largest leveraged buyout in history, with a total value of about $71 billion. There’s already a fair amount of skepticism about whether that price can be financed.
Moving toward $500 — a deal that would require at least $60 billion in financing even outside of Musk’s stake — seems a bridge too far. That’s particularly true given that Tesla still is years away from creating the consistent cash flow that private equity firms like Blackstone Group (NYSE:BX) or Apollo Global Management (NYSE:APO) use to back their deals.
Meanwhile, it’s not like Tesla can sell itself to another car company. Neither Ford (NYSE:F) nor General Motors (NYSE:GM) could afford such a deal. Toyota (NYSE:TM) and Honda (NYSE:HMC) would seem odd suitors. German manufacturers like Daimler AG (OTCMKTS:DDAIF) and BMW (OTCMKTS:BMWYY) are spending billions of dollars to compete with Tesla, not buy it.
All told, the idea of a bidding war for Tesla looks like a stretch.
Keeping Your Tesla Stock
Shareholders could either to sell at 420 or hold shares & go private
— Elon Musk (@elonmusk) August 7, 2018
Of course, Musk also floated the idea that public shareholders could keep their stakes once the company goes private. The problem is that’s not necessarily true, particularly for smaller individual investors.
Investors in a private company like Tesla have to be “accredited.” Tesla’s hedge fund and institutional investors qualify. Many Tesla shareholders do not. Accredited investors must have at least $1 million in net worth outside their residence, or income of at least $200,000 ($300,000 for a couple) for two years.
Musk seemed to say the company could get around that problem through a “special purpose vehicle” like that used by sister company SpaceX through Fidelity. The problem is that Fidelity has said no such vehicle exists. That company’s major fund owns part of SpaceX, but that’s not the same thing as direct ownership of SpaceX.
There is no structure currently existing whereby individual investors could own — and trade — a private company. And it’s exceedingly unlikely that the SEC would allow such a structure. It would provide a blueprint for other — and potentially less reputable — companies to run an end-around against regulations designed to protect individual investors.
So there is a significant question as to whether investors can keep their shares. And a lot of Tesla shareholders would be very disappointed if they had to convert their shares at $420 or even higher.
What if Musk Isn’t Telling the Truth?
All told, particularly for uber-bullish Tesla shareholders, a buyout isn’t great news. But at this point, no buyout might be worse.
If Musk doesn’t have funding “secured,” as he wrote, that could constitute securities fraud. Legal arguments aside, it would only cast further doubt on the CEO’s credibility. Tesla already has a long list of broken promises. There’s the infamous “pedo” tweet. Should the buyout fall through, or even should Musk have to walk back his comments, Tesla has a real problem.
After all, this is a company that is supposed to — and needs to — create a manufacturing footprint unrivaled in the world. The plan from Musk is to build better cars at better margins than anyone else in history.
And yet the CEO can’t get off Twitter. He creates short-term targets like production of 5,000 cars per week by the end of Q2 and then blames short sellers for the quarterly earnings cycle.
Tesla the company, and Tesla shareholders, would be much better off if Musk simply got off Twitter and stopped worrying about the outside noise altogether. As long as Tesla is making progress, those errors will be forgiven.
But floating a buyout that never was going to happen? That won’t be. Not by shareholders, not by the market, and potentially not by regulators. From here, with Tesla stock at $371, individual investors are taking on that risk for what potentially could be a rather paltry reward if the buyout goes through.
As of this writing, Vince Martin has no positions in any securities mentioned.
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