Tesla board assessing proposal by CEO Musk to take firm private
‘Risks of added financial leverage’ could be reason to avoid move, analyst warns
Board members at Tesla are evaluating CEO and chairman Elon Musk’s US$72 billion proposal to take the electric car and solar panel maker private.
Six of nine members said in a prepared statement Wednesday that Musk began talking with the board about the move last week. This included discussing how being a private company could better serve Tesla’s long-term interests. Board members met several times and also addressed funding for the move, according to the statement.
The eccentric Musk announced the bombshell move Tuesday on Twitter, writing that he had secured funding to buy Tesla Inc.’s shares at $420 each.
Shares rose 11 per cent Tuesday but fell 2.43 per cent at the close Wednesday to US$370.34.
At US$420 apiece, buying all of Tesla’s shares would cost about US$72 billion, but Morgan Stanley analyst Adam Jonas wrote in a note to investors Wednesday that he expects about US$50 billion in additional net debt. Musk owns about 20 per cent of the Palo Alto, Calif., company’s stock, so that likely would reduce the cost of the buyout.
Musk also said he intends to give Tesla’s existing shareholders the option of retaining a stake in the company through a special fund, if they want.
Jonas wrote that he understands Musk’s desire to avoid the pressures of quarterly earnings as a public company. But he thinks that those benefits could be outweighed “by the risks of added financial leverage, which can be even more strategically limiting.”
There still are near-term execution risks around ramping up Model 3 production and the ability to generate cash, Jonas believes. “Adding as much as $50 billion of net debt to the capital structure would clearly intensify the outcomes of such an action,” he wrote.
Musk, his brother Kimbal and director Steve Jurvetson were not included in the statement from members Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, Linda Johnson Rice, and James Murdoch.
By taking Tesla private, Musk believes that the company will be able to sharpen its long-term focus of revolutionizing an automobile industry dominated by fuel-combustion vehicles without having to cater to investors’ fixation on how the business is faring from one quarter to the next.
Making money has proven elusive for Tesla while it has been investing in electric car technology and ramping up production of its vehicles, including a sedan with a starting price of US$35,000 to appeal to a broader audience.
The company has only posted a quarterly profit twice in its history and has never made money during an entire calendar year, something that Musk has been trying to change by cutting costs, including recent mass layoffs that trimmed Tesla’s workforce by nine per cent. Tesla lost another US$717.5 million in its most recent quarter.
Musk has promised a sustained net profit starting in the third quarter.