Musk’s Tesla buyout plan could test Wall St’s nerves
Aleveraged buyout of electric carmaker Tesla could be an ominous sign of market exuberance, but investors may need more justification to run for the exits. CEO Elon Musk’s suggestion on last Tuesday that he wanted to take Tesla private at $420 a share, putting a value of $72 billion on the carmaker, had some investors wondering whether getting such a huge deal completed would signal that Wall Street has become overheated after nearly a decade of gains following the 2008 financial crisis.
“A mega-lbo of a company notorious for its cash burn rate would be the clear sign that this is the ultimate market top,” Mike O’rourke, Chief Market Strategist at Jonestrading, wrote in a client note. “This is the type of behaviour often witnessed at market extremes.”
Still, others took the opposite view, seeing Tesla as an exception to the rule. The company draws both love and hate on Wall Street, being simultaneously favoured by institutional investors like Fidelity and also the most heavily shorted major stock on the market.
“I don’t think that the Tesla news tells us much of anything about the broader market,” said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas. “Instead, it is just a reflection of Elon Musk’s personality and how much he hates being accountable to shareholders and short-term measures of success.”
Indeed, a deal is far from done and may never materialise. Pointing to the rate at which Tesla is burning through cash, growing competition from other electric carmakers, and its difficulty hitting production targets, analysts and investors were sceptical that lenders would be willing to finance what would likely be the largest leveraged buyout in US history.
In addition, leveraged buyouts usually depend on growing earnings to determine how much debt can be serviced to complete the buyout, but Tesla has never yet produced an annual profit, so dealmakers said any buyout transaction for Tesla could probably not involve placing much more debt on the company.
Tesla lost nearly $2 billion last year as it struggled to ramp up production of its Model 3 sedan, and while Musk said last week that the company would become consistently profitable starting in the September quarter, he has failed to reach many targets in the past.
Compared with its peers, Tesla’s valuation has had a runaway ride. At $63 billion, Tesla’s stock market value is already larger than General Motors, at $53 billion.
Reflecting shareholders’ expectations that Tesla will grow its production exponentially, its market capitalisation is equivalent to about $626,000 for every car it sold last year, compared to GM’S valuation of about $5,500 per car it sold.
If Musk’s deal were to be done, it would be larger than the $44 billion buyout of TXU Corp in 2007, which was the largest ever, and would even top it in inflation-adjusted terms of $55 billion.