Does A Tesla Going Private Transaction Make Sense? Here's The Math

Assume for a second that there were no pending questions facing the Elon Musk proposed MBO of Tesla: that the funding was indeed secured, that the Board has signed off on the deal, that the requisite number of shareholders had agreed to roll their equity into the new structure and so on.

What would such a deal look like?

First, the baseline parameters as defined by Musk: At $420 per share, and using an estimated 186.5MM diluted shares outstanding (including exercisable options, and convertible debt that would theoretically be in-the-money), the implied equity value is approximately $78BN. When combined with an adjusted net-debt of approx. $6BN, this implies an  Enterprise Value of $84BN —which indicatively is 23.5x Goldman's 2020E EBITDA estimate and 17.5x consensus EBITDA.

The next logical question is what could potential financing and interest expense look like post an MBO, in other words, what does the math of the proposed deal look like? It is here that things quickly turn ugly as an analysis by Goldman's David Tamberino finds.

According to the Goldman analyst, with $9bn in net-debt, Tesla is currently levered his 2.6x our 2020E EBITDA (and 1.8x on consensus), and the current annual interest expense is tracking toward $650MM — driving an implied average interest rate of approx. 6% (of course a full-blown MBO largely funded by junk debt would have a far higher interest expense). If adjusted for in-the-money convertible notes, leverage would drop to 1.7x GSe 2020 (and 1.2x consensus) —with an implied interest rate of 7.3%.

Assuming the company could fund debt at a similar rate, no other shareholders converted to the private structure, and outside equity capital was not lined up — this would imply debt of $68.5bn with interest expense of approx. $5bn. Not only would that lever the company up to 14x Consensus EBITDA, but the interest expense alone would be higher than forecast EBITDA generation, in other words assuming no capex, the company would be cash flow negative, hardly what any LBO investor wants to hear.

For the pro forma analysis, we take a traditional LBO approach of 6.0x leverage - in-line with historical LBOs - to get $21BN of debt financing on Goldman's conservative 2020E EBITDA, or $29BN consensus — leaving a need for incremental equity financing in the amounts of $40 to $47bn depending on whether one uses the consensus or Goldman EBITDA. While this would lead to lower interest expense, it would not result in positive cash flow generation when consensus capex of $3.6BN is considered.

To allow for the range of outcomes outside of these two structures, Goldman has created the following sensitivity analysis showing potential interest expense at various funding structures.

With that hypothetical analysis in mind, the next and key question is does $420/share represent fair value?

The answer is: it depend on your views of the company's growth.

For this analysis we revert to Goldman's operating assumptions, and specifically the bank's "potential upside" scenarios, in which - even when faced with growing competition from OEMs - the company achieves mass market volumes in the 2 to 3 million vehicle range in 2025; for context, Goldman's base case assumes only ~800k in 2025.

In those upside scenarios, Goldman ascribes valuations (discounted back to early 2019) for the overall company that average to approx. $414 per share. Naturally, Goldman is quick to point out that its base case valuation implies a much lower potential value per share for Tesla - roughly $116 or nearly a quarter of Musk's proposed take out value - given the slower growth rate and forecasted lower margin profile.

Finally, some have wondered whether the Dell MBO is an applicable comparable case study? The answer, according to Goldman, is maybe, but the underlying EBITDA/FCF characteristics were far more favorable.

A quick flashback of what that deal looked like: In 2013, Dell management led a buyout of the company for $25bn — financed through management’s ownership stake (16%, valued at over $3bn), $750mn in cash on the balance sheet, some incremental equity holders, and debt of approx. $19.4bn (debt-to-equity ratio of 3.5x). While the transaction was somewhat similar in nature to what is being proposed at TSLA, the EBITDA generation and cash flow characteristics of the business were very different given a more mature product and growth profile: Dell’s reported 2013 adjusted EBITDA was $5.1bn (implying 3.4x leverage at-close) and FCF generation was approx. $3BN.

By Comparison, excluding working capital gimmicks, Tesla is run rating around $1 billion in cash flow burn per quarter.

In other words, even if one assumes that all the MBO preconditions are in place, and Musk does indeed have the financing locked up, the far bigger question is just who would have agreed to lock themselves up to a capital structure that is more suitable for a mature, cash flow generating business, whereas Tesla still remains largely in the realm of pure equity - after all just the interest expense alone would leave zero residual cash for equity investors.

Comments

TheSilentMajority Fri, 08/10/2018 - 07:35 Permalink

Private or public makes no difference to the final outcome.

Tesla will go bankrupt sooner rather than later. It’s not a matter of IF, its a matter of WHEN.

Anything “strategic” done in the interim is just delaying the inevitable.

Ponzi schemes have a finite life.

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In reply to by thereasonablei…

roddy6667 wmbz Fri, 08/10/2018 - 08:48 Permalink

While Americans fawn over Musk's expensive toy for rich jerks with self-esteem issues, the Chinese have been quietly building affordable EV's. Every day I see EV's from at least ten different makers on the street. Most of them are rentals, like ZipCar in America. You rent it with a phone app when you need it. They are parked at recharging/rental  stations everywhere. Most people in China live in mid-rises and high-rises. They have parking garages beneath, but they cost up to $50,000 just for a parking space, and they don't have electricity to each space, only to the lights. Parking is hard to find for gasoline vehicles. There is nowhere to park and charge an EV. The rural poor live in single family homes where a car could be parked and charged, but they are not the demographic that buys EV's.

These cars range from small 2-seaters similar to a Smart Car to sedans to SUV's. The system China is using now means a person doesn't have to buy a parking space. He doesn't have to look for a place to recharge. He saves money by only paying for a car when he needs it. Most driver-owned cars are idle 23 hours a day.

In reply to by wmbz

Adolfsteinbergovitch Fri, 08/10/2018 - 07:44 Permalink

Whereas the argument presented in this otherwise very interesting M&A article are compelling, i am just scratching my head over the interest rate of 7.3% mentioned in here. Is this legit or does it include GS' cut by design?

Let it Go Fri, 08/10/2018 - 07:50 Permalink

With his now infamous Tesla "going private" series of tweets Elon Musk has created a huge dust-up. Questions are surfacing such as where or who is the bank and is the SEC going to push hard and demand Musk is not just jawing the stock higher. The type of questions being asked suggests Tesla could come under an enforcement investigation if regulators develop evidence that Musk’s tweet was misleading or false.

The article below is an updated overview of Elon Musk and Tesla looking into how we got to this point. It includes some numbers that may surprise more than a few investors.

 http://Elon Musk And Tesla Motors - An Updated Overview. html

Catullus Fri, 08/10/2018 - 08:13 Permalink

This is GGGRRRREAAT. Because you still have to do most of this anyway a deal doesn't get done AND they have to issue shares this quarter. Which one wonders, when are they going to announce some sort of tender offer?

marcel tjoeng Fri, 08/10/2018 - 08:27 Permalink

 

 

" .. Who?"
 

China / a couple of Chinese billionaires or stateside, comes to mind.

Tesla, and Elon Musk’s vision and crazy lunatic management style are a 110% fit to the China Communist Party recently new and updated “Xi Jinping’s great leap forward”.

China has the money, they have the China Central Bank print it, they have been doing this for almost 30 years now,

or rather, technically, the PBOC central bank backs the china state investments banks, the Bank of China BOC, the China Construction Bank CCB, the Agricultural Bank of China ABC, the Industrial and Commercial Bank of China ICBC and the preceding China Investment Bank CIB, via asset derivatives futures.

New York merchant bankers, Goldman Sachs and the father of Timothy Geithner, Peter Geithner who ran the Ford Foundation Asia Desk comes to mind, who taught how to do this to a rehabilitated chinese economics professor in Peking who was introduced to Deng.

The Saudis initially asked to buy added shares which was refused by Tesla. Worldwide, is there any other sovereign fund that is in the market for buying super high-risk Tesla bonds or shares?

…. (that’s a real question)

 

 

 

zob2020 marcel tjoeng Fri, 08/10/2018 - 11:41 Permalink

Whoever would not be happy elon is babbling up the shareprice and making them lose money, which is why it can be considered bullshit. Deals are never announced one second too early. Which can only mean no deal actually exists.

Which means he has committed a crime and it remains to be seen whether sec will take him to court or not and if there will be any kind of sentence. Its not like white collar crimes are ever really punished particularly harshly if even prosecuted at all. Especially with the federal government who also as it happens owns the courts, is also funding said company they would be punishing.
It would be like burning down your own home in order to spite your own investments.

In reply to by marcel tjoeng

Hope Copy Fri, 08/10/2018 - 08:41 Permalink

To the 'whale' buyer, this math is rather inconsequential, it is more like doubling down and getting dollars or dollar denominated notes to the exiting shareholders/bond-holders  In some circles, dollar denominated notes are exceptionally easy to obtain.

 

Building cars in California is only for the well entrenched, in-fact, building anything in California is really tough business.

mariner22 Fri, 08/10/2018 - 08:44 Permalink

Tesla would be the ultimate hedge for a very wealthy Middle Eastern country totally dependent on oil sales with more money than things to invest in...

Nunyadambizness Fri, 08/10/2018 - 09:02 Permalink

Face facts--Tesla going private is never going to happen, at $420/share.  Never.  There aren't enough billionaires on the planet willing to lose that much money.

Tesla has NEVER made a profit, ever.  They had ONE QUARTER where they made money, but that was a flash in the pan, and they've lost BILLIONS ever since.  Their stock price is built up because of people trying to ride the wave, and like every wave, eventually it crashes into the sand.  In graduate school we priced stocks according to the value of future earnings, and based on that TSLA stock price should be $0.00.