The soap opera over Tesla's going private deal may be over, but the autopsy of just what happened, how and why the "deal" collapsed in well under a month from its "funding secured" announcement lingers. And, as it turns out, Elon Musk has nobody but himself to blame for what may otherwise have been a possible deal, despite the staggering odds.
Recall that as part of Musk's "funding secured" assurance, the most widely mentioned name was that of the Saudi sovereign wealth fund (PIF): after all, few other institutions had the capacity - and eccentricity - to pull off such a feat. However, as we discussed several days after Musk's fateful Aug.7 tweet, Saudi Arabia would likely get cold feet - in similar fashion to its withdrawal of the Aramco IPO - as the world's attention focused on its strategic planning and its dwindling finances - the fund is currently engaging in a back door funding deal involving Sabic as well as grandiose plans that include a massive new city in the desert - just days after it had already acquired a minority, 5% stake. There was also the issue of SoftBank granting the Saudi fund permission to engage in a transaction of this magnitude.
Well, as we now know, after the Tesla CEO abruptly called the deal off just before Midnight Eastern Time on Friday, and just days after Goldman and Morgan Stanley were retained, Musk was "sorely mistaken" - as Bloomberg politely puts it - when he tweeted “funding secured” and later told the world “investor support is confirmed,” based on his belief that Saudi Arabia’s Public Investment Fund was eager to back his venture.
Two things to note here:
First, following Musk's seemingly manipulative, potentially fraudulent tweet, the SEC is now investigating his tweets and blog posts, which triggered the stock gyrations throughout August. It's always why investors now must brace for another bout of volatility when trading in the stock - which really trades like an option on the credibility of the Musk narrative - opens Monday morning, "while regulators and lawyers autopsy what happened to a deal potentially valued at $82 billion and Tesla’s board is left with a brilliant but exhausted and erratic CEO."
Second, and far more important, is the realization that as we suggested two weeks ago, Musk appears to have sabotaged his own deal. Bloomberg explains:
Musk’s vocal ambitions stirred unease among Saudi officials about the publicity surrounding their potential role, according to people familiar with the matter who asked not to be identified. The Saudis were unhappy about Musk detailing his talks with the Kingdom’s sovereign wealth fund in an Aug. 13 blog post, where the CEO justified his earlier tweet about “funding secured” on their interest, the people said. On top of that, there were concerns about potential fallout from shareholder lawsuits and the SEC investigation, the people said.
Worse, it was Musk's eagerness to "burn the shorts" without delay, that soured the Saudi interest: as Bloomberg adds, "Musk and the Saudis hadn’t yet reached an agreement on the terms or structure of their participation before he pulled the plug." That, in addition to the PIF's interest Tesla competitor, aspiring U.S. electric-car maker, Lucid Motors Inc., is what appears to have crushed any hope of the Saudis becoming an anchor investor in any Tesla going private deal, even though there may well have been some hope before Musk decided to spill the beans on twitter and on the Tesla blog.
The WSJ confirms as much in a Sunday night article:
Musk cited Saudi Arabia’s sovereign-wealth fund as the source of his secured funding: “Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction.”
That rankled some senior officials in the kingdom, according to people familiar with the matter. Prince Mohammed bin Salman has big ideas to turn his petrostate into a technology and solar-power hub as part of his plans to develop its economy. And he was interested enough in Tesla to consider being part of a take-private transaction; the Saudis had already bought a near 5% stake in Tesla in the public market. But the Saudis never made a formal proposal. A Saudi government official and an adviser familiar with the talks said the country’s senior leadership was divided.
Mr. Musk’s tweets and the blog post didn’t help. The government official said his behavior worried some officials about his health as well as the role he would play in the company.
All of this left Tesla's advisors including Goldman, Morgan Stanley and Silver Lake scratching their collective heads what was going on:
... discussions about how a deal might proceed were still at a very early stage when [Musk] decided to call off the plan, according to people familiar with the matter. Banks had at most just a couple of weeks to assess the situation, after being brought in to advise only after Musk’s initial tweet, said the people, who asked not to be identified as the details aren’t public.
It's not even clear if Tesla's retainer to Goldman and MS had cleared: the banks may want to check if the company - whose liquidity remains precarious - didn't put a stop payment on it now that Musk has grown bored with the whole affair.
But wait, there's more, because according to the WSJ, Musk actually did manage to line up the money thanks to his banks, and while we doubt this particular narrative, this is what allegedly happened last week:
On Monday and Tuesday, advisers from Goldman and Silver Lake plowed ahead on a deal that might work. By Wednesday evening, they had a presentation for Mr. Musk, proposing a roster of deep-pocketed investors, including Volkswagen and Silver Lake itself, that had agreed to contribute as much as $30 billion, people familiar with the matter said.
However, these weren’t the kind of investors Musk had in mind, who appeared hung up on the Saudi being the anchor investor. He was, in the WSJ's words, also deeply suspicious of rival car companies, believing they wanted to piggyback on what he called the “Tesla halo.” He also was lamenting a loss of small investors, who had been his most vocal champions.
Finally, the deal team advised him, the money would likely come with strings attached: The new investors would want a lot of say in the company, and each would likely want to hammer out terms of their own.
The following day, Thursday, the board meeting convened at the Tesla factory conference room, where Musk had told some board members earlier in the day that he had doubts about the proposal.
The advisers said they were confident it could be done, and then left.
Then Mr. Musk spoke. Based on the latest information I have, he said, I’m withdrawing the proposal.
“Woohoo,” one board member let out.
What happens next is unclear. Musk’s decision to scrap his plan leaves even more questions open about where he and the electric-car maker go from here. As Bloomberg points out, leaving ownership as is puts the scrutiny back on Musk’s all-consuming work style, the company’s tricky cash position, its ability to meet mass-market production goals, and the independence and oversight of Tesla’s board.
The next measure of how Tesla bounces back may come in early October, when it will report third-quarter production and deliveries. The company has said it expects to make 50,000 to 55,000 Model 3s in the quarter, which averages to roughly 4,200 vehicles a week at the higher end of the guidance
This may be a major problem, because as some independent observers have noticed, there suddenly appears to be a "significant production problem at Fremont", perhaps the true catalyst behind Musk's catastrophic approach to disclosing his going private intentions.
There is a significant production problem at Fremont.— skabooshka (@skabooshka) August 27, 2018
The finished vehicle lot is now unpopulated with low rate of vehicle outflow.
In the past I’ve reported manufacturing shitdowns. What we’re seeing today is serious. Tho cars are being produced (at a very low rate). pic.twitter.com/s8GGcmjOl0
Even perpetual Tesla cheerleader Gene Munster appeared concerned: "Eventually this will blow over, but it’s going to take at least six months. This is not a situation where we can just forget about it. It’s created a new layer of questions for investors. And now Tesla needs to get back to basics, which is ramping Model 3 production and profitability."
But perhaps the biggest risk factor of all, is also the reason why Tesla's stock price is as high as it is (if not for much longer): Musk himself:
The SEC investigation and investor lawsuits related to the whipsawing stock will at minimum continue to divert management’s time from operations, Joel Levington, a senior credit analyst with Bloomberg Intelligence, said in a note Saturday. Musk’s exhaustion, which the CEO described in a New York Times interview, is the “most critical near-term concern."
And while Musk's creative talent and visionary brilliance are widely recognized, the CEO will soon be able to add one more notch to his list of firsts: a Harvard case study of how to spectacularly blow up a going private transaction in less than three weeks, while putting yourself at risk of incarceration.