As of this writing it's been 48 hours since Elon Musk's initial tweet of his intention to take Tesla Inc. (TSLA) private at $420 per share. The tweet included the now famous/infamous words: funding secured.
The market is increasingly doubting that statement, as Tesla shares have fallen 4.5% as of 12:30 p.m. ET Thursday. So, does Elon have the goods?
What any interested party has to understand is Tesla's incredible record of economic value destruction, the likes of which I have never seen in my 26 years following autos. It takes effort to produce $6.3 billion in negative free cash flow over a six-quarter period, but that is exactly what Tesla just did. Note that TSLA did that while participating in the most attractive portion of the vehicle market (luxury,) with virtually zero competition and while the U.S. government was offering a massive $7,500 discount for purchase on every Tesla sold in America.
So, any participant in a Tesla LBO is going to have to overlook that financial profligacy and ignore the fact that competition in the BEV space is heating up and that those U.S tax credits begin to melt away on January 1, 2019.
Every asset has its price, but to think that Tesla's fair value is 25x 2019 EBITDA is so far-fetched as to be unbelievable.
In the absence of any real, hard information (or anonymous leaks, which seem to be just as valuable these days) the market is attributing interest on Tesla to "sovereign wealth funds (SWFs.)" The question, though, is why would these funds be any more willing to overpay massively than public equity holders?
That's what is so frustrating here; to my knowledge no one has produced a spreadsheet showing a positive return on capital from taking Tesla private. Presumably this would involve levering up the balance sheet, generating cash and then re-IPOing the company a few years down the road. That's how it has worked in other go-private transactions, and that's the only way to make money on a purported deal that would value Tesla at 3x the value its tangible assets as of June 30.
So, the market needs to know if Musk has indeed secured funding and from whom. We analysts are pesky that way. We tend to ask boring, boneheaded questions like: where are you going to come up with the $66 billion to fund the portion of Tesla' enterprise value that you do not already own at a price of $420 per share? Damn analysts! So annoying!
Seriously, though, the transaction Musk is envisioning would be the largest LBO on the history of mankind, and thus deserves extra scrutiny.
But there will be speculation about SWFs, and that's just idle talk at this point. Tesla enjoys a strong market position in Norway (the company's third-largest market after the US and China) and Norway's SWF is the largest in the world, with over $1 trillion in assets. Still, Norges Investment has never disclosed a stake in Tesla. Saudi's SWF is already in Tesla, as reported by the Financial Times, although I wonder why they would want average up by buying more shares at $420.
That's the point. Cost bases and valuations are just as important to sovereign wealth investors as they are to US mutual fund companies. I dealt with analysts and fund managers at both types of fund during my 11 years on the sell-side and never saw a difference in the pencil sharpness of employees at either one.
If the numbers don't work, they don't work. In all of my time following Tesla, I have never heard Elon Musk utter a single sentence that described his financial view of Tesla. About a year ago, he did note that Tesla's share price was "higher than we have the right to deserve," and perhaps that is why he uses so many of his shares (about 40% of his total holdings, by my calculations) as collateral for loans to fund his other ventures.
As of noon, Tesla shares are trading below their closing price on August 9th, 2017. Really. So after all the hype, there hasn't been any increase in shareholder value in the past 12 months.
Sooner or later the numbers have to make sense. You can run through any sort of alphabet soup--SWFs, PEs, VCs--to speculate on the class of investors willing to pay $420 to take Tesla private, but don't forget they all have spreadsheets, too.