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Elon Musk’s (probably serious) proposal to take Tesla private and the fallout, explained

All hell broke loose when Musk made the announcement. Now the SEC is reportedly investigating.

Elon Musk at an event in Adelaide, Australia in 2017.
Elon Musk at an event in Adelaide, Australia in 2017.
Mark Brake/Getty Images
Emily Stewart covered business and economics for Vox and wrote the newsletter The Big Squeeze, examining the ways ordinary people are being squeezed under capitalism. Before joining Vox, she worked for TheStreet.

Elon Musk’s Twitter habits have become quite a roller-coaster ride — with his latest turn being a surprise announcement that he is considering taking Tesla, the most valuable US automaker and a publicly traded company since 2010, private.

With a $70 billion price tag, it would be the largest corporate buyout ever, freeing up Tesla from some investor and media scrutiny in a year when it’s had some highly publicized struggles. The move has also put fresh scrutiny on Tesla, including reportedly from the Securities Exchange Commission, and on Musk’s sometimes erratic behavior.

The mechanics of how taking Tesla private would work — including who would fund it, whether it can happen, and what it would mean for Tesla’s current shareholders — remain largely up in the air. There are some regulatory questions in there, too, and the SEC is reportedly probing Musk’s tweet and sent subpoenas to Tesla asking for answers, because it’s illegal for companies and executives to give shareholders misleading information about potentially meaningful corporate events. And just because Tesla goes private doesn’t mean some of its other issues (for example, its low cash reserves) go away.

Here’s what’s happened: On Tuesday, August 7, Musk tweeted that he was considering taking Tesla private at $420 and already had funding secured. Current shareholders, he said, would either be able to sell at $420 or hold on to their shares and go private.

The thing is, companies don’t usually announce plans to go private in a tweet. Musk appears to have put some thought into how this would work but there are generally lots of lawyers, bankers, and board meetings involved ahead of time.

Musk’s tweet sparked frenzied trading — Tesla’s stock price shot up, and the Nasdaq stock exchange halted the stock altogether while investors cooled off. Since then, Tesla’s laid out some explanations in a pair of blog posts and revealed Musk has talked to Saudi Arabia’s sovereign wealth fund about potential funding.

Still, details remain scant. Meanwhile, the SEC is reportedly poking around on Musk’s tweet, asking whether he might not have been all that truthful when he declared such a deal was set to go.

“He has a history of typing what he’s thinking and hitting send,” Lou Whiteman, a contributor at the investment site Motley Fool and a veteran transportation reporter, told me. “It does seem like yes, there was some discussion, it’s probably something that’s been in his head a long time. It certainly wasn’t that he had a term sheet signed.”

Musk sat down with the New York Times on Thursday for a wide-ranging interview in which he acknowledged his last year had been “excruciating” and described working 120-hour weeks. The Times reported that Tesla’s board of directors is concerned about Musk’s Ambien habit and that the company is trying to recruit a second-in-command to help Musk, who the publication said “alternated between laughter and tears” during the sit-down.

Musk is sick of the short sellers and analyst calls

It’s been a rough year for Tesla, which makes electric cars and batteries. It’s continued to experience highly publicized production delays for its Model 3 car, for which it has taken thousands of $1,000 deposits from customers since unveiling the vehicle two years ago. A Tesla Model X driver died in a crash using the car’s autopilot feature in March, and the company’s stock price had its worst month in seven years that month.

Even before all this, Tesla was one of the most talked-about publicly traded companies in the world, which for Musk appears to have been a blessing and a curse.

On the one hand, it has allowed the company to develop a base of investors and customers who are deeply devoted to the company and its mission. On the other hand, this publicity has put heavy scrutiny on the company — Musk got testy with analysts and reporters on the company’s first quarter earnings call. It has also turned Tesla into the most shorted stock in the history of the stock market, meaning that a ton of investors are essentially betting it’s overvalued and its stock price will fall.

And there’s been the matter of Musk himself. He undertook an almost Trump-like war on the media in May out of anger over negative coverage of Tesla and got combative with analysts on the company’s first-quarter earnings call. His Twitter activity has become increasingly erratic and volatile, and he often squabbles with other users online. In early July, he said in an interview with Bloomberg he planned to tone down his Twitter feed. A week later, he called one of the Thai cave rescuers a pedophile.

After Musk’s surprise tweets last week, he sent an email to Tesla employees and posted on its blog that the buzz surrounding Tesla is exactly why he wants to take its shares off the market.

“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,” he wrote. He also blamed the “quarterly earnings cycle,” which puts “enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term,” and the large number of short sellers “who have incentive to attack the company.”

Efraim Levy, an analyst at the investment firm CFRA Research, said he doesn’t necessarily agree with Musk’s logic that the negatives outweigh the benefits of being public.

“While Elon Musk rationalizes that he doesn’t want the challenges of the short-termism of publicly owned companies, he’s benefited a lot by easy, cheap financing, either debt or equity issued, which would not be quite as available in a private market,” he said. “As a public company, it enhances his media exposure.”

This debate is distracting from some of Tesla’s bigger issues

Musk’s will-they-or-won’t-they dance on Tesla going private also distracts from what many analysts say is a more pressing issue: The company is in the midst of a cash squeeze.

Bloomberg reported in April that there is a “genuine risk” that the electric car company could run out of cash in 2018. (The story literally has a ticker counting Tesla’s cash burn as you read.) Analysts at Goldman Sachs, Jefferies, and Moody’s have all argued that Tesla is in deep financial trouble, despite Musk’s assertions that everything is fine. Tesla would need money to go private. But it also might need money just to stay afloat.

“Who owns the shares is a distraction if there isn’t a large chunk of capital coming in,” Whiteman told me. “Unless some of this involves new money coming into Tesla and not just buying existing shares, it’s not going to matter long term for the company.”

Gordon Johnson, an analyst at the Vertical Research Group, said in a note to clients on Wednesday that Musk’s go-private proposition was a “distraction” from disappointing demand for Tesla’s Model 3 globally.

Tesla spokesperson Dave Arnold in an email disputed that Tesla has cash issues, pointing to the company’s second quarter earnings and the $2.2 billion it has in cash, which is “expected to grow” in the third quarter. In the earnings announcement, Musk said that Tesla believes it can achieve “sustained quarterly profits, absent a severe force majeure or economic downturn, while continuing to grow at a rapid pace.”

Tesla Debuts Its New Crossover SUV Model, Tesla X
Musk speaks during a launch event for the Tesla Model X Crossover SUV in September 2015.
Justin Sullivan/Getty Images

There’s a general framework of what a deal might look like, but there are still a lot of questions

The main difference between public and private companies is that public companies have shares that are publicly traded on stock exchanges, while private companies do not. Public companies have to disclose more of their financial information, including quarterly earnings reports and other filings to the Securities and Exchange Commission, while private companies don’t. And public companies can sell equity can raise capital for expansion, projects, and investments from financial markets by selling stocks or bonds to investors.

Paying existing shareholders Tesla $420 per share to buy them out, 20 percent above Tesla’s current share price of about $350 a share, would make it worth $70 billion. Musk says that a deal won’t cost that much because he thinks two-thirds shareholders will hold on to their stakes. Loup Ventures’ Gene Munster estimates that if Tesla keeps two-thirds of current investors, it would need $25 to $30 billion to go private.

One possible source of that money: Saudi Arabia. According to Bloomberg, the country sees investing in Tesla as a way to expand beyond the oil market. The fund already has almost a 5 percent stake in the carmaker through the public markets.

Alex Sherman, a technology reporter at CNBC, explained what a deal could look like:

Musk’s offer is likely to include conditional financing from third parties, including Saudi Arabia’s sovereign wealth fund, and may have requirements that a certain number of Tesla shareholders roll over their existing stakes into a private company, according to M&A bankers and lawyers who have worked on similar transactions. Putting these conditions in a proposal will allow Musk to show the board something quickly without having to secure tens of billions in committed financing.

Still, there are a lot of roadblocks here. Munster, from Loup Ventures, says he thinks that Musk won’t want additional investors to get more than a 20 percent stake in the company — which implies the Saudi fund could only invest about $16 billion. That would mean Musk would need $10 billion more to buy the rest of the shares he wants.

Meanwhile, institutional investors, such as T. Rowe Price Associates and Fidelity, own 62 percent of Tesla’s shares, according to the Wall Street Journal. Many institutional investors require special permissions from shareholders to invest in private companies, Levy said, so Tesla would need to find a way around that. There are also SEC regulations governing how many shareholders a public company going private can have, WSJ reports.

And if the Saudis do inject more money, a deal would likely need to get the go-ahead from the Committee on Foreign Investment in the United States (CFIUS), the Treasury Department panel that monitors foreign investments in the US for national security risks.

Musk tweeted on Monday that he’s working with Silver Lake and Goldman Sachs as financial advisers on the deal and named the lawyers he’s dealing with as well. But a source told Reuters that Silver Lake hadn’t been officially hired, it was just offering its assistance in Musk’s exploration of a potential deal.

Bloomberg reported initially that Goldman didn’t have a mandate yet, either, though the company said in a note to clients on Wednesday that it was suspending research coverage of Tesla because it was acting as a financial adviser in a matter that is “fundamental to the reasonable analysis” of Tesla’s stock. A Goldman spokesperson declined to comment on Musk’s tweet. Representatives for Silver Lake didn’t return a request for comment.

In other words, taking Tesla private isn’t going to happen overnight. Munster wrote that Tesla needs to create a vehicle for existing investors to roll their investments into the private company and get regulatory approvals and a shareholder vote. “Our best guess is this will take three to nine months,” he wrote. He believes Tesla has more than a 50 percent chance of going private within a year.

This probably wasn’t just Elon Musk playing a joke on Twitter, but was it?

With a tweet, Musk set off a chain of events for a potential transaction that would typically entail pages and pages of documentation and legalese.

Musk laid out the timeline and thought process behind the tweet for the Times, saying it was an attempt at transparency but acknowledging no one had seen or reviewed it before he sent it. He said he wanted to offer a 20 percent premium on the stock’s price, which would have been $419, but rounded up to $420 because it “seemed like better karma.” Musk sent the tweet while he drove himself in a Tesla Model S to the airport.

The Times, before its interview with Musk, reported that Musk acknowledged to an informal adviser the predicament he’s gotten himself into. “He said he had done so because he was not the kind of person who could hold things in, and was angry at the company’s critics,” the Times reports. But in his interview with the publication, Musk said he didn’t regret the tweet. “Why would I?” he asked.

A Tesla spokesperson declined to comment on the lead-up to the tweet.

While he may have gotten back at the short sellers in the immediate aftermath of his tweet, when the stock’s value skyrocketed, it isn’t clear who might win in the long term. The SEC is reportedly asking questions about whether there was any factual basis for Musk to assert on Twitter that he had secured the funding. And a report from stock analytics firm S3 Partners released on Friday estimated short sellers had made $1.2 billion since Musk’s initial privatization tweet.

Joseph Grundfest, a law professor at Stanford University and former SEC commissioner, told WSJ that the likelihood of an SEC enforcement action — some sort of fine or other penalty — is “quite high.”

There’s been some speculation this could all have been an attempt by Musk to make a lame marijuana joke. Right after the tweet, a Tesla spokesperson told the Financial Times the company couldn’t confirm whether the tweet indicated a “serious intention” to privatize.

Whiteman, from the Motley Fool, told me he doesn’t think that Musk was joking but instead agrees with the assessment that it was an off-the-cuff tweet by the entrepreneur, who is often angry on Twitter.

The stock bump Tesla got from Musk’s tweet may help it hold on to some of its cash, as Tesla has $920 million in convertible bonds due in March. Convertible bonds are a type of bond shareholders can convert to stock or cash when they come due. If its stock price is above $360 at the time, they become Tesla shares. If not, Tesla has to pay the bondholders. Tesla had $2.2 billion on its balance sheet as of June 30.

UBS analyst Colin Langan has estimated that Tesla needs $25 billion over the next 10 years.

There has been some speculation that Musk tweeted out the potential buyout to boost Tesla’s stock price for the March bonds, but doing so in August and not in February wouldn’t really make sense. There has also been some speculation that Tesla was under investigation by the SEC even before the tweet, and that’s why it’s not registering new shares to raise money. The Wall Street Journal reported that the SEC last year started investigating whether Tesla had misled investors about its Model 3 production problems. An SEC spokesperson declined to comment on any probes into Tesla, as did Tesla.

Even this week, Tesla’s problems continued to mount beyond Musk’s privatization tweet. One former employee alleged in a complaint to the SEC that the company silenced internal investigations into alleged criminal activity, including drug trafficking, at one of its factories. Another former employee tweeted out pictures he alleges show damaged batteries at a Tesla facility.

Analysts and observers still have mixed opinions on whether going private would actually help Tesla. When the news broke, Munster said Tesla’s mission would be “more easily accomplished” as a private company.

Whiteman told me that might be the case, but it might not be. “If they were a private company with big pockets and could focus on making cars efficiently, I can see the appeal. But given all of the issues they have, it seems like a worthless distraction,” he said. “Just make cars, and shut people up that way.”

Levy told me he could think of one thing that would help: getting Elon Musk off the internet. “He has to stop tweeting so much,” he said.

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