Am considering taking Tesla private at $420. Funding secured.— Elon Musk (@elonmusk) August 7, 2018
A deal to take Tesla private would be unprecedented in lots of ways, starting with its sheer size. At $420 per share, Tesla would have a total enterprise value around $82 billion, including its debt. That would make it twice the size of the biggest privatization deal ever, when TXU Corp. was taken private in 2007 for $31.8 billion.
Eighty-two billion dollars is a lot of money for a company that is burning through billions of dollars and has yet to post a full-year operating profit as a public company. To put it in context, it's enough to buy both General Motors and Fiat Chrysler Automobiles, which together shipped almost 14 million vehicles more than Tesla did last year.
The sheer amount of money at stake -- and the way this was announced, in a seemingly offhand tweet -- raises a slew of questions. We'll get to all of those questions in the days and weeks to come. But I keep coming back to one thought:
Either this is for real, and it's likely to happen -- or it's an all-time epic bluff. Here's why both seem possible.
Why Musk's tweet could be for real
Simply put, it could be for real because there are good reasons to take Tesla private. In a message to employees that was shared on Tesla's corporate blog yesterday, Musk explained:
As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.
I fundamentally believe that we are at our best when everyone is focused on executing, when we can remain focused on our long-term mission, and when there are not perverse incentives for people to try to harm what we're all trying to achieve.
None of that is surprising, given that Musk has said most or all of it before. And it all makes sense.
But who would fund this deal? At $420 per share, it would take around $56 billion to buy the Tesla shares not owned by Elon Musk. It could take considerably more, if some major shareholders hold out for a higher price, unless Musk can engineer a way for those shareholders to continue to hold stakes in a privatized Tesla. (He raised that possibility yesterday.)
One possible clue surfaced a few hours before Musk's tweet, when the Financial Times reported that Saudi Arabia's sovereign wealth fund recently purchased $2 billion worth of Tesla stock. Might the fund -- which also owns a stake in ride-hailing giant Uber Technologies -- be the source of the financing Musk claimed to have secured?
It's not out of the question. It may seem bizarre that an oil-producing nation's sovereign wealth fund might want to own a big stake in an electric carmaker, but it's possible that the fund's managers are thinking of it as a hedge. Consider: If electric cars and self-driving technologies become mainstream, demand for oil will fall -- but companies like Tesla (and Uber) could grow significantly in value.
But that said, it does seem like a stretch to think that the Saudi fund, or anyone else, would put up that much money for a majority stake in a money-losing electric-car maker. That leads me to consider the other possibility: Is this a huge bluff?
Why this could be an epic bluff
Offhand, I can think of a couple of reasons why Musk might have raised the possibility of a buyout without committing to the idea, giving Tesla's share price a huge boost. (They probably aren't the only two possibilities, just the two that seem likeliest to me.)
First, Tesla has two big convertible debt issues coming due: A $920 million issue due in February of 2019, and a $1.38 billion issue due in early 2021. Significantly, both convert to stock if Tesla's share price is above specified levels -- around $360 per share. If Musk can get Tesla's stock price above that level, and keep it there, then Tesla won't have to spend cash to retire the debt. With Tesla currently in cash-preservation mode, that would be a huge, huge win.
The second possibility is less likely, but I don't think we can rule it out entirely: This might be Musk's attempt to burn the investors who have sold Tesla's stock short. As the quote above makes clear, Musk sees short-sellers as a huge burden on Tesla -- and he'd probably see their collective financial demise as a major victory for the company. Running the stock price up to around $400 for a while would hit most short-sellers very hard.
The upshot: The world is awaiting more details
If this is for real, Tesla will presumably make a formal statement about it soon, lest it face tough questions from regulators. (If it turns out there is no serious intent to take Tesla private, or if the funding isn't in fact in place, then those tough questions might start with, "Did Musk make a false statement in order to manipulate Tesla's stock price?")
Tesla will presumably want to head off such questions, quickly. Until we learn more, it's hard to even guess how the wildest scenario to date in the history of a company known for wild scenarios is likely to play out.