What’s in a Saudi buyout for Tesla?
Company can bring some cred to oil giant, but Elon Musk may find his fans not so understanding
Bloomberg reported on Sunday that Saudi Arabia’s Public Investment Fund (PIF) is in talks with Tesla to fund chief executive Elon Musk’s much-publicized August 7 “taking Tesla private” tweet.
It’s still early days and there’s been much conjecture as to who might have the wherewithal to buy Tesla — I posited that it could be Saudi Arabia’s PIF, Apple or the Norwegian sovereign wealth fund while Wired thought it might be Saudi Arabia or China — and even if there was a buyer that wasn’t a figment of Musk’s imagination.
Huge questions remain. Is the PIF shopping? If so, were the Saudis actually shopping Tesla before Musk’s now-famous tweet (a seemingly innocuous question made inordinately large by his boast that funding was already secured)? What does Saudi Arabia get out of any such deal? More importantly, what are the pros and cons of such a leveraged buyout (LBO) on Tesla’s short- and long-term health?
Assuming there is some fire with all this smoke — and one must remember that Reuters ran a story countering Bloomberg’s, noting that the PIF had no interest in funding Musk’s flight of fancy — then one question that needs to be answered is when the Saudis determined that they wanted to fund this grand scheme (as opposed to buying the comparatively small five per cent share they now acknowledge).
According to Axios’ business editor, Dan Primack, the conflicting reports “imply that the Saudis weren’t officially in when Musk tweeted” and the Tesla board’s attempt to insinuate otherwise is simply Musk trying to weasel out of his U.S. Securities and Exchange Commission “funding secured” drama.
As for what the Saudis get out of this deal, that’s been well detailed by virtually every news outlet covering this potential blockbuster. For one thing, the kingdom’s current regime is looking to diversify and one of its primary targets is high-tech. It is also — as we have seen recently — very much concerned about its public image and would like nothing more than to burnish what it hopes is a burgeoning reputation as a modern marketplace by building up its climate-change bona fides.
Tesla, a leader in both autonomous driving and zero emissions transportation, would seem to offer both. And if reports are correct and Saudi Arabia really does want the PIF to be a $2-trillion fund by 2020 (and, says Gizmodo, “entrench its notoriously oppressive monarchy), an investment in Tesla of 25 to 50 billion dollars would seem to be pocket change. And, if one believes some of Musk’s ardent backers — Catherine Wood of Ark Investment Management reportedly predicts that TSLA could eventually hit $4,000 a share — the deal offers the possibility of humongous returns.
So, it makes a lot of sense for Saudi Arabia, but would such an arrangement be as beneficial for Tesla? That very much depends on whether you’re taking the long or short view. Short term, there’s a lot of upside for both Tesla and Musk. For one thing, it would take some of the short-selling heat off Musk’s day-to-day running of the company. He has repeatedly decried the limitations of operating a publicly traded company, most recently mocking the naysayers by tweeting “Short shorts coming soon to Tesla merch.”
And, if the Saudis really did buy into the plan, it would take at least some of the heat off a potential SEC investigation, although there would still be the small matter of whether said intent was before or after Musk’s tweet. Nonetheless, it all looks fairly rosy in the short term.
There might be some longer-term issues, however. The major problem, as I see it, is Tesla’s reputational equity and how it might suffer by getting into bed with OPEC’s enforcer. Musk would seem not to understand, or is simply trying to ignore, the fact that for many people — a large number of whom are Tesla supporters — Saudi Arabia is the biggest, baddest Big Oil bogeyman of them all.
Whenever an eco-warrior tweets disparagement of the “industrial oil complex,” there’s invariably mention of Saudi Arabia. Ditto for just about every social justice warrior — stand up and be counted, Chrystia Freeland — looking to score virtue signalling points on women’s issues. And seriously, does Musk think we’ve all forgotten 1973’s oil crisis, precipitated by a Saudi oil embargo?
Much has been made of Tesla’s incredible stock valuation, most notably its incredible market capitalization (somewhere around US$70-million were the expected $420-per-share received) versus how many cars it produces (some 103,000 rather than the 10 million or so that auto giants such as Toyota and General Motors pump out every year). Much of that disparity is explained by Musk’s evangelical charm; even normally circumspect Wall Street fund managers pump millions into his dream simply because they have faith in Tesla’s mission.
Joining forces with a country that is both the very face of fossil fuels and a human rights pariah as well would not seem to fit Musk’s corporate idealism. In courting the Saudis, Musk risks appearing more transactional Donald Trump than righteous Al Gore.
Indeed, Musk has made Tesla into the face of environmentally friendly corporatism because he is seen as a man — if not the man — of the future. If he does take the Saudis’ money, he will have to explain why he is now teaming up with the past. In fact, the very past we all thought he was trying to destroy.
In courting the Saudis, Musk risks appearing more transactional Donald Trump than righteous Al Gore.” David Booth
— Driving.ca