Published on August 14th, 2018 | by Maarten Vinkhuyzen0
Splitting Tesla, Transitioning Shares, Updating The Board — #TeslaPrivate Possibilities
August 14th, 2018 by Maarten Vinkhuyzen
Today’s blog post from Tesla CEO & Chairman Elon Musk confirmed my WAG about the cost of going private. It is somewhere between $0 and $24 billion. For both amounts, Elon can get the funding secured. But for the amount of $???, it is a bit harder. Investors want to know how much they are going to invest, and how much influence they are going to get for that amount.
Say Elon can find 3 or 4 investors who are each willing to supply the funds to buy up to 10% of Tesla (or a bit more). Each of them likely expects to get a seat on the board of directors. Should they also get that seat when their investment is less than 1%? Or should they be on a special supervisory committee?
The way Elon wants to do this, respecting the rights of current shareholders’ first choice, can make this harder than most such deals. Normally, the strategy is focused on how to screw the current shareholders for maximum profit.
I have no doubt that Elon can find a way to secure the funds needed. He can promise that these investors will get at least 5% of Tesla each. If not enough shareholders offer their shares for $420 to this group, they will be able to buy brand new shares for that price. This could cause serious dilution, but at a great benefit to the balance sheet. This will create a few new shareholders, with a stake of 5–10% and an outsized influence.
For the largest ~20 shareholders, there should be no problem following Tesla as private company (provisions against owning a stake in a private company will be dealt with later). The rest of the institutional investors, the retail investors, the employee shareholders, and those having Tesla in a retirement plans need to be offered an alternative tailored to their needs.
What to offer the rest of these shareholders? There are a large number of constructs that can be created — all types of mutual funds, holding companies, trusts, and foundations. I have no doubt that the lawyers of Tesla can find appropriate legal constructs. But that is not what is important in my eyes.
These are different types of shareholders. They should be offered different kind of options. I once worked for a company that intended to go public after a few years. It dropped 20% of its stock in a foundation (the foundation borrowed the money from the company to buy the company stock, to be precise) and the employees earned every year a number of options on these shares. Lawyers can explain the complex pro and cons of this construct, but it payed the mortgage of many employees.
The point is that employees are a special kind of shareholders. They need the liquidity since it is their normal income and they need it to pay the rent. The employee mutual fund would be seen as one medium-sized shareholder. It should have a representation with a focus on employee interests — not UAW, but an independent director/spokesperson trusted by employees and the company. I think of someone like Robert Reich (former secretary of DOL, knows labor relations) or perhaps Jennifer Granholm (former governor of Michigan, knows the car industry and workers). These two are probably too prominent, but it illustrates my thinking.
The small institutional investors in Tesla, and those larger ones that are not allowed to invest in private companies and would like to use a loophole, also need a vehicle of their own — a vehicle listed at a stock exchange that will provide reasonable liquidity and circumvent the “no private company provision.” Creating this one should be easy for these people.
The interests of the common retail investors are diverse. Probably a general purpose type mutual fund would suffice. Someone like Galileo Russell or one of the trusted stars of the Tesla investor forums, as their investment manager and representative to the board.
For those who have Tesla in their retirement piggy banks, the fund must be tailored to certain IRS requirements. All I know about this is that it is a topic of great concern to many. But I can’t imagine that there is not a very neat solution for this.
To these solutions, there is a cost. Tesla should start to pay a very tiny dividend to cover the costs of these constructs. Joining these funds should be quite straightforward. You simply convert your Tesla shares to shares in these funds — 1:1 is the most logical way to do it.
And they all should remember the KISS principle. If you start thinking from first principles about what is needed, the solution should present itself.
To handle matters such as the above, Musk and Tesla have shared who they’re now working with to find solutions. Below are a couple of tweets followed by the full blog post linked from the first tweet.
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
— Elon Musk (@elonmusk) August 14, 2018
Update on Taking Tesla Private
By Elon Musk
As I announced last Tuesday, I’m considering taking Tesla private because I believe it could be good for our shareholders, enable Tesla to operate at its best, and advance our mission of accelerating the transition to sustainable energy. As I continue to consider this, I want to answer some of the questions that have been asked since last Tuesday.
What has happened so far?
On August 2nd, I notified the Tesla board that, in my personal capacity, I wanted to take Tesla private at $420 per share. This was a 20% premium over the ~$350 then current share price (which already reflected a ~16% increase in the price since just prior to announcing Q2 earnings on August 1st). My proposal was based on using a structure where any existing shareholder who wished to remain as a shareholder in a private Tesla could do so, with the $420 per share buyout used only for shareholders that preferred that option.
After an initial meeting of the board’s outside directors to discuss my proposal (I did not participate, nor did Kimbal), a full board meeting was held. During that meeting, I told the board about the funding discussions that had taken place (more on that below) and I explained why this could be in Tesla’s long-term interest.
At the end of that meeting, it was agreed that as a next step, I would reach out to some of Tesla’s largest shareholders. Our largest investors have been extremely supportive of Tesla over the years, and understanding whether they had the ability and desire to remain as shareholders in a private Tesla is of critical importance to me. They are the ones who believed in Tesla when no one else did and they are the ones who most believe in our future. I told the board that I would report back after I had these discussions.
Why did I make a public announcement?
The only way I could have meaningful discussions with our largest shareholders was to be completely forthcoming with them about my desire to take the company private. However, it wouldn’t be right to share information about going private with just our largest investors without sharing the same information with all investors at the same time. As a result, it was clear to me that the right thing to do was announce my intentions publicly. To be clear, when I made the public announcement, just as with this blog post and all other discussions I have had on this topic, I am speaking for myself as a potential bidder for Tesla.
Why did I say “funding secured”?
Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction.
Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed.
I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement.
Following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.
Another critical point to emphasize is that before anyone is asked to decide on going private, full details of the plan will be provided, including the proposed nature and source of the funding to be used. However, it would be premature to do so now. I continue to have discussions with the Saudi fund, and I also am having discussions with a number of other investors, which is something that I always planned to do since I would like for Tesla to continue to have a broad investor base. It is appropriate to complete those discussions before presenting a detailed proposal to an independent board committee.
It is also worth clarifying that most of the capital required for going private would be funded by equity rather than debt, meaning that this would not be like a standard leveraged buyout structure commonly used when companies are taken private. I do not think it would be wise to burden Tesla with significantly increased debt.
Therefore, reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed. The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private. My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla.
What are the next steps?
As mentioned earlier, I made the announcement last Tuesday because I felt it was the right and fair thing to do so that all investors had the same information at the same time. I will now continue to talk with investors, and I have engaged advisors to investigate a range of potential structures and options. Among other things, this will allow me to obtain a more precise understanding of how many of Tesla’s existing public shareholders would remain shareholders if we became private.
If and when a final proposal is presented, an appropriate evaluation process will be undertaken by a special committee of Tesla’s board, which I understand is already in the process of being set up, together with the legal counsel it has selected. If the board process results in an approved plan, any required regulatory approvals will need to be obtained and the plan will be presented to Tesla shareholders for a vote.