Tesla CEO Elon Musk tweeted, as you do these days, that he was exploring the possibility of taking Tesla back into private ownership. He even gave a price, 420 dollars a share, and claimed he has the backing to do it at that price. CEO’s look to take company’s back into private ownership when the company, in their opinion, is undervalued by the open market. Elon Musk and maybe the Saudi’s believe this is the case, as there was a report in the Financial Times that the wealth fund had acquired a stake in the company. Mr Musk’s turbulent relationship with the capital markets, in which he believes they focus too much on short-term targets, could also influence his desire to take the company back into private hands.
Tesla generated negative cash flow of 3.5bn dollars last year and is now valued more highly than BMW. To service, the debt required to take Tesla private could be in the region of six to seven billion dollars a year. If this is possible then one must assume that the deal will not be structured in a normal way as Tesla could not currently finance that burden of debt. Whether the Saudi’s believe Tesla is a good investment to diversify away from oil, may be a possibility.
The shares currently trade roughly 15 pct below the 420 dollar mark reflecting the risk the deal does not happen. At least now the short sellers would appear to have the upside price capped. If the deal did not complete the break may be quite painful. There are still some analysts who believe Elon Musk will need to raise capital this year. If the deal to take the company private did fail, that would suggest the valuation was considered too high. Also, speculators could start to bet on a market raise adding further pressure on the share price, as it could be harder to execute. Tesla appears to be now “in play”.
Tesla does not consider itself a car manufacturer but a technology company. This is just as well as historically car manufacturers have been industries that destroy value, not creators. Mr Musk apparently once told investors they should buy Ford shares. Not sure if he is regulated to give financial advice, but given the relative valuations and risks he might be right.