Tesla Boss Elon Musk Wants to Go Private

Billionaire investor Elon Musk has always done things his own way, from designing space rockets to manufacturing electric cars. Now the Tesla Inc CEO is looking to reengineer how a company can be taken private.

Musk announced on Twitter on Tuesday that he was considering taking Tesla private for $420 per share, or $72 billion, in what would be the biggest deal of this kind. He said the funding for the deal was secured, but did not provide details, Reuters reported.

Tesla shares ended up 11% at $379.57, indicating investors gave some credence to the plan.

But investment bankers and analysts reacted with skepticism, telling Reuters it would be hard for Musk, whose net worth is pegged by Forbes at $22 billion, to raise the equity and debt financing needed for the deal given Tesla is not turning a profit.

“The company is cash-flow negative. How do you use any debt on a company that is cash-flow negative?” said Steven Kaplan, a University of Chicago professor who researches private equity.

In an email to employees released by the company, Musk argued that being private would create “the environment for Tesla to operate best”, freed from “wild swings in our stock price that can be a major distraction for everyone working at Tesla”.

He also said the company would be freed from “quarterly earnings cycles” that put it under pressure to hit short-term targets, and that being public gave short sellers a chance to attack the company, turning it into “the most shorted stock in the history of the stock market”.

Just Like Dell

Finding equity partners and bank financing is key to take-private deals. When Michael Dell took his eponymous computer maker private for $24.9 billion in 2013, for example, he brought in buyout firm Silver Lake that contributed $1.4 billion in equity, raised more than $10 billion in bank debt, and received a $2 billion loan from Microsoft Corp.

When a Twitter user commented on Musk’s proposed deal by posting “Just like Dell did. It saves a lot of headaches”, Musk responded by tweeting “Yes”.

Dell’s take-private deal, however, may not be possible to replicate with Tesla, which has a $10.9 billion debt pile, is losing money, and whose bonds are rated junk by credit ratings agencies.

Without the ability to add more debt, Musk may have to turn to sources of capital that are less accustomed to using debt to juice returns in the way private equity firms are.

Possible Partners

One option could be sovereign wealth funds, investment bankers said.

Saudi Arabia’s Public Investment Fund has taken a stake of less than 5% in Tesla, a source familiar with the matter said on Tuesday.

SoftBank Group Corp’s $93 billion Vision Fund, whose investors include the sovereign wealth funds of Saudi Arabia and Abu Dhabi, is seen as an obvious partner given its appetite for big technology investments, but was not contacted by Musk and is not interested in a deal given its investment in Tesla competitor Cruise, the self-driving car unit of General Motors Co, according to a source familiar with the matter.

China’s Tencent Holdings, which took a 5% stake in Tesla last year, is another possible partner.

However foreign capital sources would be subject to scrutiny by the Committee on Foreign Investment in the United States, which reviews deals for potential national security risks. Any proposal for funding from Chinese firms could face even tougher checks amid mounting US-China trade tensions.

Some Failures

Many attempts by founders and top executives to take their companies private have never come to fruition. In March, Qualcomm Inc Chairman Paul Jacobs stepped down from the board to pursue a long-shot take-private bid for the US chip maker, which has a market capitalization of $93 billion. To date, this bid has not materialized.

US department store operator Nordstrom Inc’s attempt to go private also failed earlier this year, after banks balked at providing the necessary financing to the founding family members seeking to put together the deal.

Special Purpose Vehicle

Musk has said he would be looking to keep his ownership of Tesla at around 20% and that a special purpose vehicle, like the one that exists at his aerospace company SpaceX, would allow Tesla shareholders to remain invested if they so choose, and then cash out when they wanted.

But sources familiar with SpaceX told Reuters it is not clear how Musk would apply it to Tesla. Fidelity Investments, the major backer of SpaceX, did not invest in it through a special purpose vehicle, according to the sources.