Market Stunned After Musk Discloses Intention To LBO Tesla, Lawsuits Threatened

Update 10: After all that, nobody has any idea what just happened, and a word being increasingly thrown around is lawsuit. As Yahoo's Rick Newman writes, if the LBO deal described by Musk with "funding secured" is true, it’s a boon for shareholders. But if it’s not true, Tesla is in trouble, and shareholders may feel the pain.

“If funding is secured, then it’s a factual statement,” says John C. Coffee, director of the Center on Corporate Governance at Columbia Law School. “But if he can’t prove that, he’s in some danger of a big lawsuit because short sellers will be devastated by this.”

On Aug. 7, Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” Those nine words sent the stock soaring from $342 to around $370, an 8% jump. Then the Nasdaq exchange temporarily halted trading in the shares, pending clarification of material news by the company.

About three hours after his momentous tweet, Musk posted a message to employees explaining his rationale for going private. He cited “wild swings” in the stock price and frequent attacks by short sellers as “a major distraction for everyone working at Tesla.” He cited Space X, the  rocket-launching company where Musk is also CEO, as an example of a privately owned company better able to focus on a complex long-term mission. “A final decision has not yet been made,” he said.

And some further observations:

If Musk’s aim was to temporarily boost Tesla’s stock in order to force losses on short sellers, it could be considered stock manipulation, which is illegal. “That’s too inviting to a plaintiff’s lawyer not to sue,” says Coffee. “This would be an attractive lawsuit. The people who think he’s manipulating the market would say they’ve suffered an injury, and you could pull all those losses together in a class action.”

If, on the other hand, Musk can demonstrate that he has actually arranged financing for a private buyout, or made serious efforts to do so, he might be off the hook.

Musk will now be under pressure to promptly disclose whether a buyout offer is serious and where the money would come from. The company is worth about $62 billion (after the Musk-tweet surge), and there would likely be a premium of 25% or more to entice current holders to sell, and give up future gains. At Musk’s price of $420 per share, the buyout would value the company at  around $71 billion

In short: if this was indeed Musk's final "burning" of the shorts, and an LBO is just a figment of his imaginations, it will be the shorts who will have the last laugh.

And if there is a lawsuit, and one person who will be laughing, it will be the biggest TSLA bear: Jim Chanos, who gave the following statement to CNBC:

* * *

Update 9: After being halted for over an hour, TSLA stock has reopened at $371 and has risen to $381, up 11.5%. The record stock price is $385 on Sept 18, 2017.

The bonds, however, which have a 101 Change of Control put, are far less confident about the deal going through:

* * *

Update 8: On its blog, Tesla has published the following email that Elon Musk sent to employees today, which appears to be merely another attack on Tesla shorts:

The following email was sent to Tesla employees today:

Taking Tesla Private

Earlier today, I announced that I’m considering taking Tesla private at a price of $420/share. I wanted to let you know my rationale for this, and why I think this is the best path forward.

First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. 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.

This is especially true for a company like Tesla that has a long-term, forward-looking mission. SpaceX is a perfect example: it is far more operationally efficient, and that is largely due to the fact that it is privately held. This is not to say that it will make sense for Tesla to be private over the long-term. In the future, once Tesla enters a phase of slower, more predictable growth, it will likely make sense to return to the public markets.

Here’s what I envision being private would mean for all shareholders, including all of our employees.

First, I would like to structure this so that all shareholders have a choice. Either they can stay investors in a private Tesla or they can be bought out at $420 per share, which is a 20% premium over the stock price following our Q2 earnings call (which had already increased by 16%). My hope is for all shareholders to remain, but if they prefer to be bought out, then this would enable that to happen at a nice premium.

Second, my intention is for all Tesla employees to remain shareholders of the company, just as is the case at SpaceX. If we were to go private, employees would still be able to periodically sell their shares and exercise their options. This would enable you to still share in the growing value of the company that you have all worked so hard to build over time.

Third, the intention is not to merge SpaceX and Tesla. They would continue to have separate ownership and governance structures. However, the structure envisioned for Tesla is similar in many ways to the SpaceX structure: external shareholders and employee shareholders have an opportunity to sell or buy approximately every six months.

Finally, this has nothing to do with accumulating control for myself. I own about 20% of the company now, and I don’t envision that being substantially different after any deal is completed.

Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees, as possible.

This proposal to go private would ultimately be finalized through a vote of our shareholders. If the process ends the way I expect it will, a private Tesla would ultimately be an enormous opportunity for all of us. Either way, the future is very bright and we’ll keep fighting to achieve our mission.

And, once again, zero mention of the "committed" funding, where the money for the LBO will come from, what the capital structure would look like, or any analysis for that matter.

Musk did decide to tweet again, however, and claim that "Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote." It wasn't clear how shareholders can vote for a deal without knowing who the investors are...

* * *

Update 7: With Wall Street patiently waiting for something resembling an 8-K which the company is scrambling to put together based on Elon Musk's tweets now that the stock is halted following the CEO's unexpected "LBO announcement" on twitter, Musk continues to tweet only in response to questions, and while he has ignored a question where the LBO funding will come from, when asked if investors could "invest once private", Musk responded "Yes, but liquidity events would be limited to every 6 months or so (like SpaceX)."

And then, in response to question if investors will be allowed to co-invest, Musk said "no forced sales" and added that he hopes "all shareholders remain. Will be way smoother & less disruptive as a private company."

And the punchline, which perhaps brought on the LBO tweetstorm to begin with, Musk said that an LBO "Ends negative propaganda from shorts." Of course, it also eliminates the possibility to force a short squeeze with a spurious narrative about taking a company with a multi-billion cash burn private at a valuation of over $60 billion, which would make it bigger than TXU, and the largest LBO in history.

Meanwhile, speaking on CNBC, a Financial Times journalist made it clear that "bankers close to Tesla have no knowledge of the buyout." Come to think of it, until just two hours ago, Tesla didn't either.

* * *

Update 6: The LBO by Tweet continues, with Musk now saying that "Shareholders could either to sell at 420 or hold shares & go private."

In a subsequent, and the latest so far, tweet, Musk also added that he is "super appreciative of Tesla shareholders. Will ensure their prosperity in any scenario."

Update 5: Tesla stock was finally halted at 2:08PM, well over an hour after Musk first tweeted:

  • *TRADING HALTED:(TSLA) Halt News Pending

Update 4: Musk now reveals that he plans to use a "SPV" for the going private transaction:

Update 3: Bloomberg commentator Sebastian Boyd is not buying it for a very simple reason: math (although meth would make it more palatable):

Some Tesla Math

Incidentally, Tesla has a free-float of 127.5 million shares. At $420 a share, that would cost you $53.6 billion. The company already has net debt of of $8.8 billion and an adjusted net leverage ratio of 13 times. Were it to be bought in a management-led LBO, a back-of-the envelope calculation would give it a leverage ratio of over 90 times, worse on a trailing 12-month basis. You can't run a company on math like that.

Update 2: And just like that, the fluid situation has just gone from bizarre to absolutely surreal, because in his very next tweet, instead of providing additional details on what is a major market moving annouincement Musk said...

Although, in a follow up tweet, Musk appears to confirm the "deal":

And another alleged confirmation comes from Ross Gerber of Gerber Kawasaki:

The bizarre odyssey continues, with Musk responding "Yes" to to a question that an LBO "saves a lot of headaches":

For now the stock has no idea what is going on:

* * *

Update: Never one to miss an opportunity, Elon Musk has just tweeted - from his verified account - that he is considering taking the carmaker private at a price of $420, and even suggests he has the funding...

In a subsequent tweet, responding to Fox Business News' Liz Claman, Musk confirms that he is apparently indeed serious.

The stock prompt spiked even higher...

... even though nobody has any idea what is going on: is it legal for Musk to say what he did without halting the stock first? Is he simply baked and inviting countless law suits? Who is providing the massive debt to a company with billions in negative cash flow? At what rate? Can Musk even do this when he is a top shareholders (and stands to reap huge gains) and his announcement creates a massive conflict of interest?  If this is even close to true, TSLA bonds (those without a change of control clause) should be sliding.

Or maybe this is just another attempt by Musk to create a short squeeze and "crush the shorts."

And if he is really about to MBO - CDS buyers will be loving it...

*  *  *

EARLIER

Did we just find the latest greater fool?

The FT reports that Saudi Arabia’s sovereign wealth fund has built a significant stake in Tesla - the latest bold bet by the state fund overseen by powerful crown prince Mohammed bin Salman.

Saudi’s Public Investment Fund (PIF) built the undisclosed stake of between 3 and 5 per cent of the electric vehicle maker’s shares this year, according to people with direct knowledge of the matter.

Interestingly, The FT reports that PIF initially approached Musk about purchasing newly issued shares but Musk reportedly rebuffed the offer - perhaps anxious of the perception of further dilution and the promises he made of  the need for more capital.

Note, however, that Tesla gets $0 from this secondary market investment - at a time when the carmaker is losing a record amount of money.

Tesla shares are jumping on the news...

And TSLA bonds are up but remain considerable "cheaper" than stocks...

The Saudi state fund reportedly acquired the position in secondary markets with the help of JPMorgan - which is odd since JPMorgan has an 'underweight' on TSLA with a profit target of $195 (a great way to get the stock lower for their wealthy gulf clients).

And all this coming just weeks after Aramco suddenly decides to raise billions in debt instead of IPOing?

More recently, the PIF has been in talks with global banks to borrow between $6bn and $8bn, marking the first time that the vehicle entrusted with driving the kingdom’s economic transformation will directly tap banks to fund its mission.

A skeptic might wonder whether, since Tesla can’t buyback stock directly using debt-issuance (WACC too high), it is using US bond investors as a source of funds and Saudis as the proxy buyer to achieve the same effect.

Comments

Free This Tue, 08/07/2018 - 12:33 Permalink

A pedo profit!? The house of fraud has spoken!

I always wondered why he made cars under a tent, now we have the answer.

Step right up, buy your flamethrowers right here! Don't worry about the auto-pilot snags, it won't hurt for but a nanosecond!

spastic_colon FullHedge1 Tue, 08/07/2018 - 13:11 Permalink

"We are not so sure if that is even legal to say and neither are investors..."

LOCK HIM UP!            lol

UPDATE - what's an even better way to hide a fraud than being a public company??

UPDATE2 - wow, after reading the hastily compiled employee email, if you think tesla is not a complete failure than you are not comprehending the impending black hole about to be witnessed with your money. If you own tsla sell with all fours! musk is making this up on the fly.

UPDATE3 - so the long an short of this is that musk got tired of people actually finding out the truth about tesla.

In reply to by FullHedge1

TeethVillage88s evoila Tue, 08/07/2018 - 13:41 Permalink

Tesla, Inc. Market Cap $50 B, so he thinks he has the dollars and other investors to take it private.  Hm... but is it worth $50 B?  Will it please the state under state capitalism that he goes private.  Perhaps TSLA needs CFR, Chatham House, Trilateral Commission... other big bank players to agree with him?  He has been the Golden Boy for the State, but is his fake Electric Car Tech really worth investing in when it is not producible at parity with gas cars?

In reply to by evoila

RAT005 overbet Tue, 08/07/2018 - 14:01 Permalink

I'm not a finance guy but what if this is just a variation of QE? USA prints $50 billion more for the banks to loan SA who spends it liquidating TSLA stock and just like that there is $50 billion more greenbacks floating around the globe to lower the value of $USD and ease the demand by the 3rd world countries that US gov doesn't like vs trade wars.

In reply to by overbet

toady nope-1004 Tue, 08/07/2018 - 16:24 Permalink

If he pulls this off he's not accountable to anyone... just keep getting a couple billion here and there from governments... couple billion in oil money from the Saudis.... a couple billion in taxpayer money from the U.S.... a couple billion from the Russian oligarchs...

He can keep this going forever!
 

In reply to by nope-1004

NiggaPleeze sanctificado Tue, 08/07/2018 - 18:19 Permalink

Why is the ZH article full of "LBO"?  Where did Tusk speak about an LBO?  Sure, he wrote that "funding" is secured, but that could be debt or equity (or a mix).

Also a tender offer does not require a shareholder vote.  Requires a board vote.  Shareholders are free to tender or not.  A merger requires a shareholder vote.  That may be the approach (assuming it's a bona fide claim, which is doubtful for sure) Musk is looking at since he thinks the current shareholders can remain shareholders (problem is, once the company has over 500 non-accredited (or 2,000 total) shareholders, as Tesla has, it is REQUIRED to be a public company by law; and conversely, so long as the issuer has at least 300 shareholders of record (including DTC participants but not street name holders) it cannot "go dark").

In reply to by sanctificado

Adolfsteinbergovitch roea.rita Tue, 08/07/2018 - 21:25 Permalink

Are your kids from different fathers? 

Ooops my bad...

 

Regarding Tesla he probably announced 2 things:

  1. He may want to take it private to shut it down cleanly and avoid Enron like stories
  2. He will certainly not pay $420 per share

So he's short squeezing to sell his stocks and leaving buy orders well below official target price. 

Go on Elon, way to go. How are your other businesses doing? Great? Sure...

In reply to by roea.rita

lock-stick Adolfsteinbergovitch Tue, 08/07/2018 - 23:47 Permalink

It's all ONE SICK, PATHETIC SPAMMER!!!

•• roea.rita (above)

•• Adolfsteinbergovitch (above)

•• Sanctificado (above)

•• Free This (coming soon, in all his 7th grade glory - JACKASS  as new icon!)

....and all the while, the pathetic little SPAMMER sits in his leaky, moldy, smelly single wide in Western New York, surrounded by garbage and dirty clothes, trying to find his dick amidst rolls of fat, talking to his ACTION FIGURES and wondering where his life went.

 

It's all ONE SICK, PATHETIC LIDDLE SPAMMER!!!

In reply to by Adolfsteinbergovitch

SumTing Wong ZeroPorridge Tue, 08/07/2018 - 16:52 Permalink

Here  I was thinking I was the only one who saw that part of the trolling.

Man seems unhinged, and he seems like he is under a great deal of stress. Why could that be? Is his world going to shit? And now he tries to tell everyone that it's all good? If I'm a sheik who has a bunch of cash, why do I invest in this company that keeps getting orders cancelled? Why do I worry about a company that doesn't want to use my oil?

This is one trip too far for even Musk. Someone give him his meds so that he can get on an even keel again.

In reply to by ZeroPorridge

DaiRR SumTing Wong Tue, 08/07/2018 - 21:23 Permalink

Tesla functionally is spiraling down before it crashes and burns.  The big auto makers are the ones who will succeed in the electric car market long term.  Tesla will be a niche at best and equal chance it will fade away all together.  This tweet by Musk is more evidence of his desperation.  Check who's selling the next 24 hours.

In reply to by SumTing Wong

NickelthroweR toady Tue, 08/07/2018 - 19:27 Permalink

Greetings,

I do not normally like to correct people but it was discovered during the crisis of '08 that the people over at the SEC were watching 8 hours of hardcore gay porn each and every day.  That was "discovered" during an audit to figure out what went wrong.  

I'd like to think they are imaginative enough to watch midget tranny porn but these guys work where they do because they have no real skills to offer to the economy so I'm sure it is still hardcore gay porn.  Maybe Two Guys, One Cup kind of stuff.

In reply to by toady

tangent Pool Shark Tue, 08/07/2018 - 17:24 Permalink

Your claim seems to be that announcing a private offer for a public company is a felony. Well, I doubt it. But go ahead and list your evidence and then quote the part of the law which you imply you know so clearly. Until then, I clearly don't believe you. Even if it were a felony, it would at face value seem like a full frontal assault on basic freedom of speech. If there is an offer to take the company private, I think its perfectly good that Musk is sharing limited information on that in public. I'm not seeing the problem. I think what you mean to say is "clearly basic on a dozen assumptions you've made without any evidence" but I'll check back for a reply tomorrow.

In reply to by Pool Shark

not dead yet tangent Wed, 08/08/2018 - 01:34 Permalink

If Musk does not have a buyer or financing set up for a Leveraged Buyout he is violating the law big time by misleading investors. Musk is already under investigation for misleading investors by making promises that were never met. What has everyone in a lather, and rightfully so, is Musk has given no details of the who and the financing for going private. It is highly unusual, or almost unheard of, for an honest company to make this kind an of announcement and not giving any details. You can bet your ass with this announcement the SEC will stop watching porn long enough to call Musk and demand the details. What also does not add up is the company is hugely overvalued, full of debt with a huge cash burn, and quality competition coming to market as we type which means it's a hoax on Musk's part, which means jail, or there are some people out there with too much money and not enough brains taking a huge gamble.

For those questioning the $420 per share offer it's typical in a buyout, merger, or going private. To get everyone onboard and make for a quick closing it's normal to offer a premium to the current market price

Your lying POS pal Musk claims Tesla is the most shorted stock in history. Like so many of his pronouncements it's complete bullshit. Tesla shorts have run between 35 and 40 million yet Alibaba has 133 million shares short currently. AK Steel 78 million. Plenty more in the 30 to 40 million range and that's just the A's for the NYSE. This is just one of the many lies Musk comes up with, and like the others easily debunked, yet everyone except the shorts and those that know better takes Musk at his word every time. I'd still like to see the order book where Musk claims to have those hundreds of thousands of orders.

In reply to by tangent

tangent tangent Wed, 08/08/2018 - 08:40 Permalink

24 hours later, the crickets chirping are so deafening. I ask for a shred of evidence and get nothing. I notice I have a crowd of haters downvoting people who ask for evidence of ridiculous assertions of a felony. If I were Musk, I'd sue that liar. Perhaps these mental lightweights should start to wonder about people who have zero evidence of their claims instead of worrying about hating people who are nearly always right about their investment advise, like "Don't short Tesla" that I have been offering repeatedly that last month free of charge. These downvoters who got burned should instead be sending me money for investment advise.

Perhaps one of the >20 upvotes who liked hearing bullshit legaleze can offer some of this missing evidence. Lawyers who are busy in court citing legal sections are more often on the losing side of the debate, whether for good reason or not, in my experience.

I expect more from my fellow smartasses on ZH than being on the side of fake news. Smarten up or die shorting Tesla. Not sure if it is unshortable at this price or not as it has gone up quite a lot since I last looked into it. Six months ago I did a decent amount of research on the company and it was really doing fine. Specifically, if Tesla could continue chipping down their battery prices they would end up making a good profit.

But where is the ZH stories on whether Tesla has continued to do that? Hmmm, the professional journalism has been replaced with "oh my god a car fire, short Tesla". Stupid. Very stupid. I'm specifically telling the shorts now if they want to "win", then they have to put up or shut up. What is Tesla paying for batteries now? Feel free to just thumbs down a perfectly good question and bury your head in the sand while continuing to get burned by you call the Tesla "fire sales".

In reply to by tangent

sessinpo toady Tue, 08/07/2018 - 19:05 Permalink

toady RAT005 Tue, 08/07/2018 - 14:47 Permalink

Say what you want about Elon and his various lunacys, he's one smart motherfucker.

Still getting all those government subsidies, and no longer has to answer to price discovery.

Have your cake and eat it too Elon!

----

Actually most of the subsidies are gone. The billions of tax payer money has already been wasted. And now he has put himself in a position that he does indeed have funding for an LBO or it could be considered stock manipulation. He played his hand. Not to see if he is bluffing.

In reply to by toady