Tesla Board Responds To Musk LBO Plan Amid Furious Controversy, And One Burning Question

Update: almost one day after the Musk tweet, Tesla Board members Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, Linda Johnson Rice, and James Murdoch, finally issued a statement:

Last week, Elon opened a discussion with the board about taking the company private. This included discussion as to how being private could better serve Tesla’s long-term interests, and also addressed the funding for this to occur. The board has met several times over the last week and is taking the appropriate next steps to evaluate this.

It was not immediately clear just what the board means when it says it will "address the funding" for the deal to occur if, as Musk said previously, it was already secured.

* * *

No company has the ability to twist a wedge of discord as deeply and mercilessly between its fanatical fan base and its rabid skeptics and shorts as Tesla, and one day after Elon Musk's shocking, bizarre Tesla "going private" declaration on twitter, coupled with a vow that "funding is secured", the disagreement has, predictably, never been greater.

On one hand, there are those who say the deal can happen, and not only that but it would eventually take place at a higher price than the stated $420/share, a valuation of $82 billion which would make it the biggest LBO in history, far greater than the ill-fated (and subsequently bankrupt) TXU which marked the peak of the last financial bubble. Keep in mind TXU had gobs of positive free cash flow when it was LBOed over a decade ago; Tesla has lost money on an operating basis every year since going public and has been burning through billions of dollars.

This morning, Baird analyst, and Tesla cheerleader, Ben Kallo said that Tesla holders would likely push for a go-private price above the $420 per share that Musk suggested, and the stock price may top that mark as investors demand a higher premium and shorts cover positions. To be sure, with the stock trading over $50 below the LBO price, the market clearly sees "problems" with the deal as it is structured.

As Kallo further notes, Musk’s comment that "funding has been secured" for the deal indicates that the company has access to multiple external capital sources (even if Musk has inexplicably refused to discuss these, more on that below). Kallo also claims that Tesla’s decision not to issue shares for the reported 3%-5% stake taken by Saudi Arabia’s Public Investment Fund underscores company’s confidence in its ability to generate capital internally.

Loup Ventures analyst and managing partner Gene Munster, echoed Kallo's optimism, saying that taking Tesla private "makes a ton of sense" from Musk’s perspective although even Munster - another of Tesla’s biggest bulls - assigns a small likelihood that the deal goes through. "Musk does not want to run a public company,” Munster said. “Our guess is there is a 1 in 3 chance he can actually pull this off."

Then there are the skeptics.

Cowen analyst Jeffrey Osborne said that a leveraged buyout model wouldn’t work if existing investors were to remain as Tesla CEO Elon Musk claims they will. "The outcome largely hinges on what "funding is secured" means," Osborne wrote. "What are the plans for capital funding plans for going forward post the potential transaction? We continue to see the company’s capital needs as much higher than the company is able to generate from operations under optimistic scenarios."

Short-sellers were even more vocal: "The market doesn’t believe him," said David Kudla, CEO of Mainstay Capital Management quoted by Bloomberg, which is shorting Tesla. "His credibility has come into question over a number of things. If this were real, you’d expect the stock to go closer to $420 a share than it has."

It's not just the stock that has doubts about the deal: as we showed yesterday, Tesla's bonds, which have a 101 Change of Control put, meaning they would trade to 101 cents of par in case of a take out, barely budged yesterday, rising only as high as 92.2 cents on the dollar.


But the biggest question that remains is why, despite stating that "funding has been secured", did Musk not disclose where it is coming from.

“It is important to note that, as of today, no details have been provided with regards to what ‘Funding secured’ means,” said Evercore ISI analyst George Galliers. "Depending on where the private funding may come from, going private may provide Tesla with deeper pockets from strategic investor and freedom from the volatility of public markets."

Alternatively, and potentially a trigger for an avalanche of lawsuits, Musk could have simply fibbed, and sent out his tweet without either funding, or a discussion with lawyers of what the implications of his statement are.

And here a bigf problem for Musk emerges, because as @TeslaAgnostic points out, merely the intent of a "going private" transaction, triggers rule 13E-3, which requires the company to file a Schedule 13E-3 with the SEC as well as furnish the required disclosures to the company's shareholders. Note: the rule is triggered in either case, even if the intent to go private is ultimately unsuccessful.

 

Continuing down the skeptical path, we note one of the best original critiques of both the announced transaction, and the considerations that it will be facing which Elon Musk appears to have largely ignored during his series of tweets. The following is courtesy of @ElonBachman:

Observations about @elonmusk's $420 LBO announcement:

First, the context is odd: Musk promised on the conference call that $TSLA will be forever profitable. So why does he need to go private to "end negative propaganda from shorts"? And why let them off the hook at $420?

Musk suggests there will be no controlling shareholder in the LBO. He also says financing is already arranged. Ergo, he implies a syndicate of lenders has already signed documents for the deal. This is odd for two reasons...

  • First, Musk recently rebuffed an investment offer from Saudi Arabia. If you're passing the hat for the largest LBO syndicate in history, why say no to a big check?
  • Second, a $70B syndicate would involve numerous banks, dozens of lawyers, and multiple boards of directors. It's been [over] 12 hours since the announcement, and none of these parties has confirmed Musk's claims.

Which raises a general point: a $70B dollar deal is a Jupiter-sized briar patch of legal and regulatory rules. It's a minutely choreographed thing, with legal risk for any party that says or does the wrong thing at the wrong time. With that in mind:

Why did $TSLA not request a trading halt until an hour after Musk's tweet? Why did the company belatedly post an email from Musk, rather than an official statement? Why did Tesla not file an 8-K disclosing details of the purported LBO?

Musk says he will not sell in the deal. What about his ~$800M in margin loans? Will lenders accept illiquid collateral? What about change of control provisions on $TSLA's debt? Who will fund the mandatory tender?

Why did Musk's initial tweets portray this as a done deal, if his subsequent email revealed it to be merely his intention?

Were these plans in the works when Musk publicly predicted a "short burn of the century" and a short squeeze larger than Volkswagen? Were they in the works when he aggressively purchased $TSLA shares in the premarket?

If this deal is real, it won't be wrapped up for at least 6 months, and probably longer: a) need to assemble an independent board to vote on the deal (a court ruling this year decided that $TSLA's board is not independent of Musk), b) need a proxy statement with extensive risk disclosures (some think this is why $TSLA couldn't take the Saudi PIPE in the first place), c) need a shareholder vote, d) need antitrust review, even if perfunctory.

Meanwhile, cash burn continues - in order to avoid default on their ABL, they must have cash/avail on Jan 1, 2019 sufficient to cover both 2019 convert maturities as well as a $400M buffer. That comes to $1.8B. At June they had $2.2B of cash and are burning close to $1B per quarter. Tough math.

Musk says shareholders won't be forced to sell. How does that work? A private company with thousands of shareholders is still required to make SEC filings. How will unaccredited investors retain shares?

The fact that none of these details was alluded to by Musk is further evidence that Musk has not discussed the deal with lawyers. Which brings us back to the question: how do you line up $70B in financing without involving a legal team?

 By now you will have deduced my skepticism that this deal is real. Gambits like this are not uncommon at penny stock companies facing liquidity problems. And Musk is facing liquidity and possibly regulatory problems.

Is this his attempt to manage his legacy? To make fans think they were all about to be called up to the $70B rapture, but at the last minute the dastardly shorts and regulators pulled down heaven?

For now the market remains torn: while the stock jumped on the double whammy of the Saudi investment news and the Musk going private "deal", the price is well below the $420 target price... and dropping in the pre-market.

The good news is that the price of TSLA remains above the $359.8676 conversion price on some $920 million of convertible bonds due March 2019, giving the company the option not to pay down the note in cash but to convert it into more TSLA stock. And for Tesla whether private or not, with its multi-billion annual cash burn, and a rapidly declining cash balance, avoiding repaying this debt is critical.  In fact, it may explain Musk's entire "half-baked" LBO diversion.

Now the only question is if the regulators have also noticed and will finally start asking questions.

Comments

spastic_colon Keyser Wed, 08/08/2018 - 09:00 Permalink

this guy already said he owned 20% of the company; all the fanboys and girls that are salivating to stay invested IF they go private deserve to be the bagholders with NO transparency.......just the way musk wants it.

UPDATE - the boards statement is trying to make it sound like elon madoff and the company's idea was premeditated and before his off-the-cuff remarks......it was not.

In reply to by Keyser

FireBrander Boing_Snap Wed, 08/08/2018 - 10:36 Permalink

1. Musk is going down with his ship; and he's taking the crew, passengers and people cheering the sinking from a neighboring boat, down with him.

2. "Taking it private"...LOL...I have never heard of a "private" Ponzi operation...how the Hell does that work?

3. He's said it himself, he's (paraphrasing) "not concerned about earning a profit; never has been...not what this is about". BUT...I'll bet you a dime his suppliers are concerned about a "profit"...and that .gov wants it taxes...and the employees want their checks to cash...that takes REAL money...that either comes from profits (which don't exist) or "investors" (which he now wants to shut out new suckers).

4. Folks around him, keep a close eye...this is how you find people "expired" of "cough syrup" overdoses in bathroom #22 of 46 in their palaces.

In reply to by Boing_Snap

mtl4 Last of the Mi… Wed, 08/08/2018 - 12:03 Permalink

Elon Huckster has certainly has lost his focus (mind) on this one.......he obsesses over stock price doubters when all he really needs to do is focus on making the product......because, well, according to him demand outstrips supply by a large margin.  Good to know people are still interested in buying a rolling crematorium made out in tent city.  This guy is a master of distraction and the issue is that the closer you get to the truth the more wild his statements become.  I suspect he knows Tesla is near the frying pan and this would be a great way to block folks from ever knowing the truth and burning those dreaded shorts at the same time, assuming he actually has a greater fool lined up to deal with the, um, cash flow (ponzi) problem.  Lawyers are gonna be lining up to take a crack at this one.

In reply to by Last of the Mi…

lock-stick Socratic Dog Wed, 08/08/2018 - 13:46 Permalink

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

•• roea.rita ("I SUCK DICK ON THE INTERNET FOR LAND ROVERS!")

•• Adolfsteinbergovitch ("I TORMENT THE WOMAN WHO SUCKS DICK!")

•• lisa.roy39  ("I SUCK DICK ON THE INTERNET FOR LAND ROVERS!")

•• Leakanthrophy (PORN for Jesus!)

•• Cryptopithicus Homme (bitcoin spammer - imaginary "friend")

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

•• 07564111 ("I PRETEND I DON'T KNOW ANY OF THEM!")

•• MoreSun (whacked, OH SO WHACKED!!)

•• Africoman

•• Sanctificado

•• beemasters

•• PrivetHedge

•• Cheolli

•• bobcatz

dozens and dozens and dozens of banned log-on's -- more than seven years!

 

....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 Socratic Dog

Bring the Gold lock-stick Wed, 08/08/2018 - 14:05 Permalink

I really hope Tesla successfully LBO’s. I haven’t had a stake in Tesla since it’s early days. Sadly sold wayyyy too soon.

 

The main reason I would be happy is to A) See all the shorts get mercilessly crushed. And B) so zerohedge and their giant short position would get Fried and we’d never hear about Tesla again. They take up wayyyy too much headline space on this site due to obvious short position of the Tyler(s) whoever they are.

 

The founding Tyler is Long since gone and who knows who runs this place anymore. The quality of this site has gone to shit in past 9 years peaking in 2010-11ish right around the time Tyler got pissed at Marla (can’t recall exact date). It’s heen downhill ever since. So Tyler of the day getting his ass handed to him over Tesla would be hilarious and open the site to reporting on this that matters again. 

In reply to by lock-stick

FBaggins Bring the Gold Wed, 08/08/2018 - 16:08 Permalink

Correct me if I am wrong, but something really smells:

In the beginning Tesla looked like a good business venture because of limited oil reserves in the world and the promise of increasing oil prices. 

The prospects for vast profits were very promising for the people who control US fiances, and Musk an insider bought a controlling interest of the company.

Eight years ago Musk brought the company public to raise funds developing its then upcoming Model S electric car.  However, the company was also at the time awash in red ink. It had lost $290.2 million since its 2003 founding, and its first-quarter loss in 2010 was $29.5 million, but a $465 million U.S. Department of Energy loan helped the company gain some momentum.

Musk's companies, Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups.

It is government money being used and not exclusive private money for such risks, but what is the difference when the same people control US fiances, the Fed, and the government? 

A year before Musk announced his recent intention to take Tesla Motors private all things seemed to go wrong for the company, like thousands of Model 3s electric cars dormant in various parking lots as if they are not selling (as if they have really tried), production delays, and numerous unprecedented numbers of Tesla austos catching fire with occupants dying - very dramatic. The stocks stocks begin to fall and then Musk just recently announces his plans to go private.  

What promise does Musk really see in his various models? Has this very connected man or the people behind him made efforts to screw SH's by depressing  share value?  

 

 

In reply to by Bring the Gold

Antifaschistische bamawatson Wed, 08/08/2018 - 09:13 Permalink

I have no credible opinion on Elon and his financing.

However, you can tell the big money insiders, who have their plants all over the SEC are pissed...because they get all the inside info out of the SEC.  Elon, dropping his bomb without having initiated the 13E-3 breaks the insider trading protocol with the big boys on wall street that were balls to the wall short on Tesla.

I can't believe what I'm hearing in my own head, a silent cheer for Elon on this one.

ps.  Maybe when Elon was in China THIS is what he was discussing.  the Chinese love Teslas.

In reply to by bamawatson

Jim in MN Antifaschistische Wed, 08/08/2018 - 09:27 Permalink

I dunno, watching Tesla and Saudi Arabia both lose their minds at the same time makes me wonder.....what Israel's up to.

I guess I'm just old fashioned in this regard. 

Plus, the Israelis have to be in the center of the FB-Goog-Twitter-YouTube global panopticon bullshit.

Too much is going sideways at the same time.  Something is afoot.

Trump circling Ukraine very, very quietly.

Getting ready to cut Israel and Saudi loose on their own in the ME.

Syria and Afghanistan shutting down.

Globalist gambit getting green gills.

What about the drugs?

What about the weapon smuggling?

What about the human trafficking?

What about the money laundering?

It's all soooooooo inconvenient........

In reply to by Antifaschistische

PitBullsRule Keyser Wed, 08/08/2018 - 09:36 Permalink

Another stupid argument!

Why would he need to pay back subsidies? The government subsidized them because we have a need for electric cars, and the government got more electric cars.

You losers think you have a case, you have no case. You try to make a profit on the demise of people that are working and building great things. You are losers, and you lost. He outsmarted you, and now you whine and lie and snivel like worthless little pussies because you're losing money.

LOSERS!

In reply to by Keyser

Miner RedBaron616 Wed, 08/08/2018 - 11:21 Permalink

> Do you have any idea how NOT GREEN battery production and recycling is?

Yes, actually, I do.  Li-Ion batteries are orders of magnitude better than lead acid and NiCd/NiMH in this regard.  Your argument here is based on old technology.  It's also worth noting that Tesla has dramatically exceeded its battery life projections.  An 8 year old leaf is on it's last legs, with capacity down more than 60%, but an 8 year old Tesla still has 90% of its original capacity.  Tesla is on the ball in this department.

> You do realize that electricity is not emissions free, don't you?

You are right on this one.  If we were powering Teslas with coal it would be a huge problem.  California, the top consumer of Electric cars, currently gets 1/3 of its power from renewables, and half from Natgas.  NatGas is cleaner than gasoline.  The one coal plant left is literally a rounding error in their energy supply.

I was skeptical about Tesla for a very long time, but they seem to be actually trying to do the right thing.  Nothing in my experience as an American car consumer or investor has prepared me for a company that is genuinely trying to do the right thing.

In reply to by RedBaron616

just the tip Miner Wed, 08/08/2018 - 11:44 Permalink

no, you do not.

this is how your present day L/I batteries get made.

https://www.youtube.com/watch?v=t_UdqZdFr-w

read about it dumptruck:

http://www.digitaljournal.com/news/environment/baotou-a-toxic-lake-crea…

google it while you still can.  oh, no bother to hurry for you as you are obviously one of the chosen.  and as the process is taking place out of sight, it is out of mind, on the other side of the marble, and about the size of new jersey.

In reply to by Miner

biker_trash RedBaron616 Wed, 08/08/2018 - 16:30 Permalink

We may not need electric cars per se, but we do need cleaner more affordable cars/trucks and less cool burning for electricity. In China, where the population is 4X the USA, the cities are becoming unlivable due to the pollution. How long can that go on for?  You can argue all you want about what causes Global warming, but that doesn't address the raw filth being pumped into the atmosphere world wide now. By the way, I would never buy a Tesla since the ROI is not there. A used Prius hybrid with 80-100K miles has the best ROI if you don't mind driving a purse around ;-) 

In reply to by RedBaron616

William Dorritt Keyser Wed, 08/08/2018 - 09:49 Permalink

I don't like the subsidies either,

is Tesla a Govt hedge on oil disruption or diminishing supply, looks like it?

The auto pilot stuff I'm not crazy about for a number of reasons. If it helps the Govt control our behavior or movement, I am against it. Pay cash for everything possible.

I hope they keep pushing battery tech, and drive systems to materials sourced and manufactured in the US, preferably widely available materials.

A solar cell film skin on the vehicles would be nice if it doesn't add much or any weight. Good incentive to wash the car regularly.

In reply to by Keyser

DisorderlyConduct William Dorritt Wed, 08/08/2018 - 10:34 Permalink

Solar, even at 100% collection efficiency, can't power a car. Not even charge one fully given daylight hours and the reduction of efficiency of the panels given exposure angles.

Maybe when cars weigh 1/4 what they do now, and when we have better ways to store energy that don't weigh so much this might be viable. But right now its toy tech for people with cash to burn.

In reply to by William Dorritt

techpriest DisorderlyConduct Wed, 08/08/2018 - 11:40 Permalink

100% correct. At full sun, you get ~1kW/m^2, which is ~1.3 horsepower, assuming 100% conversion efficiency. In reality, it is 20% conversion or less, so at noon with a typical car you are getting at most 1-2 hp from a car panel. That could work with a go-kart, but not a conventional vehicle. Also, even factoring in charging during the day, ~8 horsepower-hours of stored energy is not going to give you a lot of range, and this would be for places like California, whereas places like Minnesota get about 3 standard sun-hours of light for the annual average (more like 6-7 in summer and ~1 in winter, it gets DARK up north).

If you wanted to be off-grid (IMO the only legit reason for going solar), there are arrangements you could do to make it work, basically making your homestead your main charging station. If you had an electric bus that you only moved once a month over a relatively short distance, panels on top might work, though I would opt for an RV conversion bus where the panels charged the internals. But "my car is gonna recharge itself while I work" is not going to happen.

In reply to by DisorderlyConduct