I have been reading some sites with wild stories, and no, that was not only Seeking Alpha or Business Outsider. Most stories are about how shocked the market is, how strange it was to receive this news via twitter, how nobody is willing to lend Tesla $50-70 billion while Tesla is burning a billion each quarter and losing money.
The latter is strange since it is not the Q2 2018 Tesla that will be doing business, but the Q4 2018 or Q1 2019 Tesla, and that is not a coincidence. But it appears that none of those commenters realize that Tesla just passed a huge milestone, that it is no longer “losing money like a sieve,” but becoming highly profitable.
One financial analyst even explained that banks can’t lend more money than 6 times the EBITDA of the next 6 quarters, and that a money-losing company like Tesla … blah blah blah. He clearly did not realize that 6 times the EBITDA over the next 6 quarters is way more than is needed for going private.
I am going to explain that, as far as Musk is concerned, taking Tesla private is likely a done deal.
The 4 Hurdles To Take
The first hurdle many see are the independent directors. They are not in the pocket of Musk, and they have to look out for the interest of all the stakeholders. They also may be a little more conventional and risk averse than Elon.
In his letter to employees, Musk mentions the interest of most stakeholders, shareholders, customers, and employees. I could add suppliers and neighbors, but that’s implied. When discussing the benefits of taking Tesla private, many commenters did see that it was in the interest of most stakeholders. The independent directors have an obligation to support this proposal if it is indeed in the best interest of most stakeholders.
The second hurdle is the large amount of money Musk needs, and that likely “nobody” is willing to supply. Why I think this is wrong I’ll explain later.
The third hurdle is support of the board. Even without it, a single shareholder can ask for a vote, but it would be like a hostile takeover with Musk voting for the motion and against the formal advice of the board. Not going to happen — the board has no choice but to support it.
The large institutional investors are the fourth hurdle. Musk has to get promises from them that they will keep their shares and vote with him at the shareholder meeting. From his tweets, it appears he got the confirmation, or at least a declaration of intent.
The $64 Billion Question
After eliminating the other hurdles, only the second hurdle is left. Does Elon Musk have the money to take Tesla private?
His own shares and the shares of the other insiders (top management and directors) will stay with the company. The institutional investors that can (are allowed to) invest in private companies and are willing to stay with Tesla are also excluded from the sum needed to buy the shares from those who are not willing to stay with Tesla as private company.
That still leaves a lot of shares that might be offered to Tesla to buy back. The first bite out of that pile will be taken by the shorts. They are forced to cover somewhere between 30 million and 40 million shares. And they have to buy at any price. Is it not ironical that the shorts finance a part of Tesla’s escape from the negativity and FUD of those same shorts?
About 80% of Tesla shares are owned by a small group of insiders and institutional investors, perhaps a bit more with the recent addition from Saudi Arabian and Chinese investors. To dare to tweet his announcement, I think Musk must feel confident of about 60% of that group staying with him.
In the worst case, if all other shareholders opted for $420 per share, the operation to go private needs about 40% of the $72 billion valuation of Tesla or, $29 billion in cash.
What is the chance that Musk could get commitment for that amount from his friends and relations? Or what is the chance Musk could not get that commitment?
Musk himself is worth about $25 billion. He can borrow probably 60% of that with his stocks as collateral. That is $15 billion, but if he uses it to buy more shares, those shares can be used as collateral to borrow more and buy more shares that can be used as collateral to buy more shares, etc. This is how leverage works. Only, he won’t need it, and he has used a part of his shares to borrow already, and there are probably some regulations to make it less easy than I just wrote. However, some of his friends have (way) more money than he has.
Can Musk get the $29 billion? Or does he need $0 billion because a number of investors would like to get on board with a high stake in the company before Tesla goes private?
[Editor’s side note: Robert Peck, Credit Suisse global head of internet investment banking, stated today, “I can’t comment specifically on any client that we have or prospective client that we have.” Credit Suisse has been one of the banks most bullish about cleantech in the past several years. I’m not claiming that’s an indicate Credit Suisse would be involved. But it is one possibility aside from rich tech dudes and sovereign wealth funds. h/t Curt Renz]
Is The Deal Done?
I have the advantage of working the last week on Tesla’s long-term profitability, making the next version of the “Vijay SimTesla Game V1.1”. In the coming weeks, many will make the same kind of long-term predictions.
Analysts will ask questions like these:
• What is the likelihood of Tesla passing BMW in car sales and profit?
• Will the energy storage division become as large as the automotive division?
• What will solar PV do?
• Will autonomous driving and the Tesla ridesharing network become real?
• How much cash will Tesla generate and how much will it need to finance growth?
I don’t know the answer to these questions.
Some banks are saying Musk can’t have the funding because he did not ask them. They are not showing a lot of understanding. They are the last ones Musk would ask to help him finance Tesla to get rid of them.
My bet is that Musk has the money lined up.
And in that case, going private is a done deal. As he said, it then only needs shareholder approval. History has shown that shareholders vote with Musk.