Surprise! Seventeen days after tweeting that he had "funding secured" for a transaction to take Tesla (NASDAQ:TSLA) private at $420 a share, CEO Elon Musk called the whole thing off late on Friday night.
In a post on Tesla's blog, Musk said that given the feedback he has received since his initial tweet, "It's apparent that most of Tesla's existing shareholders believe we are better off as a public company."
Of course, with Tesla, the real story is often found between the lines of its official statements. What did Musk say, why did he really call off the buyout attempt, and where does Tesla go from here?
What Musk said about his decision to call it off
Musk said that after talking to several investment banks and spending "considerable time" listening to shareholders, several things are now clear to him:
- Most of Tesla's shareholders think the company is better off remaining public.
- Allowing Tesla's smaller shareholders to participate in a privately held company would have been complicated at best.
- Some institutional shareholders have limits on how much they can invest in a privately held company.
- The process of going private "would be even more time-consuming and distracting than initially anticipated." That's bad, he said, because Tesla needs to remain focused on ramping up production of the Model 3 and becoming profitable.
To sum up: At least as of right now, Tesla's official conclusion is that going private would be too much of a hassle for the company, and a burden on its shareholders.
But I'm not sure that passes the smell test. Let's look deeper.
Why did Tesla really call it off?
As of early Saturday morning, we don't have a lot of information. But given what we know, I can think of two reasons why Musk and/or Tesla's board might have decided to end the attempt to take the company private.
Reason #1: They didn't like the price
Musk made one more point in this blog post:
- "That said, my belief that there is more than enough funding to take Tesla private was reinforced during this process."
Note that he doesn't say at what price there was "more than enough funding to take Tesla private."
Remember that while Tesla may have one of the all-time great future-growth stories, some deep cracks have appeared in that story over the last year. Tesla today is loaded with debt, short of cash, and about to face serious, direct competition for the first time.
It didn't take long after Musk's initial tweet about potentially going private for signs to appear that Tesla was struggling to find financing at his proposed buyout price. It's very possible that the banks that Musk hired to advise him on the transaction, Goldman Sachs and Morgan Stanley, told him that there weren't any (or enough) investors to do the deal at the promised $420 per share.
Fox Business News reporter Charlie Gasparino had a source inside the discussions, likely someone affiliated with one of the investment banks. Gasparino reported on Thursday that the deal might be a hard sell at $420:
SCOOP: Some bankers are unsure they can sell @Tesla $TSLA privatization at @elonmusk 's stated price of $420 a share—sources; Bankers plan to compare Musk to Steve Jobs and Jeff Bezos in pitch; they believe some investors willing to gamble on Musk—sources more now @FoxBusiness— Charles Gasparino (@CGasparino) August 23, 2018
That said, Musk's statement might still be true: There might well have been interest among potential financing sources in doing the deal -- at a substantially lower price per share.
Reason #2: Due diligence became a concern
A leveraged buyout requires would-be institutional investors to ask a lot of questions. For instance, does Tesla really have 420,000 preorders for the Model 3? Is there anything -- a regulatory action, a disclosure requirement -- blocking the company from raising cash via a stock issue? Are there questions around the deal to merge with Solar City that the company would rather not answer? When Tesla guided to a Model 3 production rate of 5,000 per week by the end of 2017 in the second quarter of last year, did the company have reason to know that wasn't going to happen?
These and other hard questions are being asked by Tesla bears every day. At least some of these questions, and likely others, are also being asked by the Securities and Exchange Commission, which is reportedly investigating Tesla.
Consider that any major investor in a going-private transaction would insist on careful due diligence around these and other questions before investing. It's possible that Musk (and/or Tesla's board) decided that the benefits of going private weren't worth what might happen if it had to answer these questions fully.
Where does Tesla go from here?
In a tweet on Wednesday, Gasparino summed up the situation as it appeared to his source at the time:
SCOOP: Bankers vying for advisory assignments on possible @Tesla privatization preparing their pitch to investors & will compare @elonmusk to Bezos, Jobs, Dell. They concede option for $TSLA will be a recapitalization if privatization plans fail —sources more now @FoxBusiness— Charles Gasparino (@CGasparino) August 22, 2018
What does "option for recapitalization" mean? It could mean a substantial injection of cash in return for equity, it could mean converting some or all of Tesla's outstanding debt to equity -- or it could mean a major reorganization of the company, possibly including a trip through bankruptcy court if Tesla is somehow blocked from raising additional capital.
None of those things are likely to enhance Tesla's share price, to say the least. A bankruptcy filing could wipe out current shareholders entirely -- but even the measures that fall well short of that could result in substantial dilution, putting heavy pressure on Tesla's still-high-flying stock price.
Of course, we also need to remember that this story has already taken several turns that would have seemed wildly improbable a month ago. It's entirely possible that another plot twist is in the works. We'll find out, probably soon.