Never mind Tesla, BMW’s the real deal for a buyout
SAN FRANCISCO: No sooner had Elon Musk tweeted his tentative proposal to take Tesla Inc private, than a debate raged about whether that’s even possible at a company that bleeds billions of dollars in cash.
But Musk’s idea isn’t a terrible one for a carmaker, it’s just Tesla is the wrong one. Germany’s BMW AG is a far better candidate for a buyout.
“BMW is awash with cash, it’s grossly undervalued, LBO funds would queue to back it as they could get their money back in a few years,” says Max Warburton at Bernstein Research. “Tesla has negative EBITDA, and couldn’t pay the funding costs for more than a month or two.”
To recap, Musk hates persnickety analyst questions, dealing with short-sellers and the burden of hitting quarterly earnings targets. But the stock market has actually been amazingly kind to Tesla. Its equity is valued at close to US$65bil, which is pretty punchy for a company that sold about 100,000 cars last year.
It has burned roughly US$8bil of cash in the past four years, according to Bloomberg data, but Musk’s fiercely loyal shareholders have been happy to keep funding his vision.
Contrast that with BMW, whose automotive unit has generated € about 19bil (US$22bil) of free cash flow since 2014 from the more than 2 million cars it sells annually. Yet, € bizarrely, its 55bil market capitalisation is lower than Tesla’s and the German group’s shares trade at a measly 7.5 times estimated earnings. Tesla doesn’t have any earnings to compare.
Unlike Tesla, BMW gets no credit for its long-term thinking, which includes early investments in electric vehicles such as the i3 – not the prettiest car, to be sure, but very impressive technically. And unlike Tesla, BMW’s heavy spending hasn’t prevented it from hitting short-term earnings targets.