Go-Private Proposal
Sources familiar with Tesla stated that the board of directors of the electric vehicle manufacturing company, Tesla, will next week hold a meeting with financial advisers. The major purpose of the meeting will be to analyze the take-private deal proposed by Elon Musk, Tesla’s CEO.
Earlier this week, Musk tweeted about taking Tesla private, in a deal which he envisages will become one of the biggest historically. According to the unnamed sources, there is a high probability that the board of directors would order him to recuse himself in preparation for the review of the company’s take-private proposal. One of the inside sources noted that the board informed Musk to seek out separate advisers.
The sources added that the board will likely set up an ad hoc committee comprising of some of the independent directors. The role of these directors will be to carry out a review of the relevant details of the buyout.
Uncertain Details
Speaking on the specifics, one of the familiar sources mentioned that the CEO and Chairman previously opened talks with the sovereign wealth fund of Saudi Arabia about reaching a take-private agreement. Earlier in the week, it was reported that Saudi Arabia’s Public Investment Fund purchased a 3%-5% stake in the electric vehicle manufacturing company. However, it hasn’t been expressly ascertained whether or not Saudi Arabia’s Public Investment Fund has fully given its consent to fund the transaction.
Also, it hasn’t yet been confirmed if the company itself has given its commitment to financing. Musk only took to twitter to state that the company already secured funding as he announced his consideration of the take-private deal at $420 for each share.
The company itself has, however, failed to issue an official comment on the transaction’s funding. The failure of the company to comment has raised speculations from different angles that Musk at the moment has no committed financing.
It has also led to request for additional information from the Securities and Exchange Commission. The CEO’s tweet caused caused frenzied trading as the company’s stock price surged higher. Also, the Nasdaq exchange reportedly had to stop the stock for investors to calm down. Although the details are still sparse, the Securities and Exchange Commission is allegedly carrying out investigations based on Musk’s tweet.
The board informing Musk to recuse himself from the meeting with the financial advisers and to also get his own advisers isn’t an uncommon move. It will be recalled that in 2012 and 2013 when Michael Dell reached a decision to have a take-private deal, Dell’s board of directors also informed him to recuse himself from the process and also separate advisers.
Just like Dell, Musk currently has a major stake in Tesla as he owns 20% of the company with a current market cap of about $59.3 billion. If the company goes private at $420 for a share, the market cap would surge to about $71 billion.
In a note by Barclays, the buyout of such a nature would need around $70 billion, which when broken down is about $60 billion on the equity side and around $10 billion to clear the debt. As indicated in the note, even with the Saudi Arabia fund accouting for a 3% to 5% stake, there would still be a huge funding gap, and the credit markets at the moment may not particularly be receptive. If the deal pulls through, it will become the biggest leveraged buyout ever as it would exceed the $45 billion acquisition of TXU back in 2007.
Distraction Strategy
Market analysts have described Musk’s actions on the take-private issue as a distraction from a more important matter. The important matter according to analysts is that the company is currently facing cash squeeze. According to a Vertical Research Group analyst, Gordon Johnson, Musk’s take-private proposal was only to distract people from the poor demand for company’s Model 3.
A media outlet reported earlier this year that there might be an actual risk that Tesla would lose all its cash before the year runs out. Analysts at major firms such as Goldman Sachs have at different points argued that the electric vehicle manufacturing company is currently facing major financial issues, notwithstanding Musk’s claim that all is well with the company.
As such analysts have opined that while Tesla requires money if it wants to become a private company, the company also needs fund to help it remain afloat.
