As we enter the third day of the Tesla "going private" saga, one big question continues to haunt investors: who is (are) the source(s) of the "secured funding" that Elon Musk promised he had arranged ahead of his unprecedented tweet that sent Tesla stock soaring, eventually resulting in a delayed halt and made Musk $1.4 billion richer.
As Bloomberg writes this morning, "no one has stepped forward publicly - or privately - to say they’re behind the plan."
People with or close to 15 financial institutions and technology firms who spoke on the condition of anonymity said they weren’t aware of financing having been locked in before Musk’s tweet.
It's not just traders who are scratching their head over this question: late on Wednesday, the WSJ first reported that regulators have also started asking the company if what Musk tweeted was factual and why such a disclosure was made via social media rather than in a filing.
But while everyone has so far focused on the Musk financing tweet, the CEO has now been caught in a second potential "untruth", which would only add to the severity of any market manipulation enforcement action lobbed at the eccentric CEO.
Recall that as part of Musk's Tuesday tweetstorm, when addressing shareholder receptivity, he said that "Investor support is confirmed."
Only, as Bloomberg reported this morning, it wasn't, as this too appears to have been gross hyperbole at best, and outright misrepresentation at worst: "At the California State Teachers’ Retirement System, which as of March owned about 213,000 shares, spokeswoman Michelle Mussuto said there was no advance warning."
“We have not been contacted by Tesla IR,” she said. “They didn’t reach out before the tweet either.”
So here's what we know so far: the "natural" source of cash for a deal of this magnitude, SoftBank, has passed on a possible deal, saying the company was "overvalued", and that following an April 2017 meeting between Musk and Masayoshi San that touched on a potential investment in TSLA (whose stock at the time was far lower), the talks failed to progress due to disagreements over ownership and have not started up again.
Meanwhile not a single bank that would be part of the obvious financing syndiate that would fund such a deal, has been approached by Musk. Finally, the investors, whose support Musk allegedly had canvassed ahead of his announcement, had little idea of what Musk was set to announce.
Surely the SEC will be curious to connect the dots between all these three potential misrepresentations contained in a tweeted "statement" that boosted Musk's own net worth by $1.4 billion.
And then there is a report from the NYT overnight, according to which Tesla and banks are studying a structure that would involve reducing the number of holders such that Tesla’s shares could be delisted from Nasdaq and it would no longer be required to make quarterly filings with the SEC, NYT reports. Call it an "LBO-lite", or what the NYT calls a "going dark" transaction.
While still expensive - it could cost $10 billion to $20 billion - it would be much less so than a full leveraged buyout, the NYT reported.
In this situation, Tesla could buy out many but not all of its shareholders to reduce the total number of investors who hold Tesla stock. One way to make that math work would be to persuade as many small shareholders as possible to sell their holdings.
The largest shareholders of the company — including Mr. Musk, Fidelity, T. Rowe Price and Scotland’s Baillie Gifford, who collectively own about 45 percent of Tesla shares — would not need to sell their stakes under that arrangement.
Tesla’s shares would no longer be listed on the Nasdaq, but investors could buy or sell them on loosely regulated, over-the-counter markets that are typically the domain of small companies. Because shares on these exchanges are generally traded less heavily than those on larger public markets, it would likely be harder for investors to bet against, or short, Tesla’s stock, which is one of the rationales Mr. Musk outlined on Tuesday for taking the company private.
While examining creative alternative structures is great, the problem for Musk is that has already represented a going private deal, together with a take out price, to the public. And with every hour that passes and neither Musk, nor the board, disclose just what were the facts that led Musk to his bizarre announcement, it becomes more likely that the SEC will eventually launch enforcement action against either the company, its CEO, or both.
Finally, as we first noted last night, the SEC has a simple solution it can pursue to end all the debate of Musk's tweet mystery. As former NYSE president Thomas Farley said yesterday, "this is an easy one: ask TSLA to show you the agreement(s) signed by their funding source(s) by 5pm EST that demonstrates the funding is “secured” and “certain.” If there is no such agreement, require a statement by 5:30pm. Inspire market confidence."
Dear @SEC_News, this is an easy one: ask TSLA to show you the agreement(s) signed by their funding source(s) by 5pm EST that demonstrates the funding is “secured” and “certain.” If there is no such agreement, require a statement by 5:30pm. Inspire market confidence.— Thomas Farley (@ThomasFarley) August 8, 2018
With the entire world watching with Musk, or the US capital markets regulator will do next, the SEC may have no choice but to pursue Farley's advice. And judging by the stock price, which recently dipped below the conversion price on the March 2019 converts, the market is starting to get cold feet about this whole soap opera.