Sunday 16 June 2019

Musk's musings on taking Tesla private show it may be best route

Elon Musk says swings in Tesla’s stock price is a distraction
Elon Musk says swings in Tesla’s stock price is a distraction

Liam Denning

The manner in which Elon Musk disclosed this weekend that he was "considering taking Tesla private" shows why this would be the best possible outcome for all involved.

The stock jumped 4pc on Musk's tweet, on top of an existing rally that had taken hold 30 minutes earlier on a 'Financial Times' report that Saudi Arabia had bought stock in the company earlier this year.

Is Musk serious? Who knows, but telegraphing your takeout price while you're only "considering" things is, well, unorthodox. That $420 figure had many speculating on Twitter it was just a joke about MJ, not M&A.

But Tesla eventually followed up Musk's string of tweets with a blog post laying out a rationale for a deal that would, if done as a straight buyout, be worth $68bn, factoring out Musk's existing stake.

The blog post went up almost three hours after Musk lobbed this into the mix, without an accompanying SEC filing or an ex-ante trading suspension (that didn't happen until the tweet had been up for more than an hour). It makes a mockery of public-market disclosure. Last week's bromides about Musk's composure on Tesla's earnings call - technically known as 'the bare minimum' for any other company - haven't aged well.

That's why, even though this bizarre afternoon raises yet more red flags around the company, it would be a mercy if Tesla did actually go private.

A couple of years ago, it would have been better if Tesla could have been an Uber-like unicorn rather than a listed company. Besides no longer having to worry about pesky stuff like the best way of disclosing material events (for example), the company could dispense with its panoply of short-term targets on things like Model 3 production, cash flow and profits.

As it is, those targets sit oddly with the idea of Tesla building a sustainable business for the long term, which is what ultimately underpins its sky-high multiples. The company could also be led by a CEO who doesn't spend even a second of his time obsessing about burning "the shorts". And that highly-paid, and largely invisible, board could probably be revisited, too (although I confess I'm curious who exactly would sit on the special committee for this deal).

Judging by the blog post, Musk seems to yearn for this himself: "As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company."

There are at least two problems with Tesla's ex-post justification for the tweet. One, there's no mention of the financing that Musk claimed had been "secured." Is it realistic to raise that much funding to buy out an unprofitable company? The only possible response at this point is another question: Is it realistic that an unprofitable company was valued already at $61 billion?

The second problem is that this all got strewn across social media haphazardly less than a week after Tesla reaffirmed profitability and positive cash flow are apparently imminent. Achieving that, rather than taking Tesla private, would be the ultimate riposte to short-sellers. So why do this now?

An intriguing element of all this is Tesla's idea of letting investors that didn't want to cash out stay in a private entity, possibly with periodic gates to sell. This would appeal to die-hard Tesla bulls dismayed at the thought of being capped out at a mere 143 times adjusted 2019 earnings. And since they clearly don't mind another red flag being put on the pile - the stock rallied further after trading resumed - holding shares without the strictures of a public company wouldn't bother them. The only thing they might miss is the adrenaline rush of trading their way through an otherwise boring weekday afternoon.

As a market operator, Tesla is a study in extremes. Its 47pc annualised gain since 2010 has done nothing to quiet an exceedingly vicious war of words between Musk and his detractors.

Musk gets many things a growth company wants from public markets: a sky-high stock, loyal shareholders, capital to expand. But they've never been enough to give him peace of mind.

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