Musk’s $6bn tweet leads Tesla to dead end

It was the $6bn tweet. Even by the standards of Elon Musk’s maverick ways, his latest stunt didn’t just tear up the rulebook. The space-exploring billionaire blasted it into another orbit. Musk’s claim, on Twitter, that he is planning to take Tesla private understandably sent Wall Street into meltdown. By the end of the day, Tesla’s share price was up 11pc, a jump of $6.3bn (£4.9bn). Musk was $1.2bn richer.

It’s hard to know where to start with this one. The rationale behind reversing the carmaker off the stock market certainly isn’t bonkers, especially for an entrepreneur like Musk, whose uneasy relationship with the public markets has neared breaking point in recent months.

In particular Musk cannot abide what he perceives to be the sort of short-term thinking that constrains public companies that are still in growth mode like Tesla. Quarterly reporting, and questions from investors about production numbers, targets, and earnings projections are little more than a distraction when you’re as evangelical about your mission as he is.

Last year, he urged investors to “buy Ford stock” after growing frustrated with criticism of Tesla’s governance. “Their governance is amazing,” he said sarcastically.

In May, he refused to respond when asked about Tesla’s financial struggles, complaining of “boring bonehead questions” that “are not cool”.

But his greatest ire is saved for the Wall Street hedge funds that have been aggressively shorting Tesla’s stock. It is the most shorted US company, with about a quarter of its stock on loan.

He has called short-sellers “jerks who want us to die” and warned in May that “the short burn of the century [was] comin’ soon”, just weeks before Tesla finally hit production targets.

The resulting surge in its shares crystallised estimated paper losses of $1.7bn for short-sellers.

Still, much as Musk would love to inflict further pain on his Wall Street detractors, this would be an extremely elaborate and high-risk act of revenge.

For a start, if his tweet was designed purely to move Tesla’s share price, it raises the spectre of manipulation and securities fraud, surely not a place even one of Silicon Valley’s biggest renegades would dare to venture.

Musk then must be serious, at least up to a point, but unfortunately taking Tesla private isn’t as easy as he makes it sound.

The biggest obstacle is financing, which would be a massive stretch for a deal of this magnitude. Although Musk’s 20pc stake reduces the amount he needs to raise, at a mooted bid price of $420 per share it would still be the biggest deal of its kind, and require close to $60bn in backing.

It’s not that there is a dearth of funding available. Far from it. Private equity is awash with cash and some of the beasts of the buyout world have just raised their largest ever funds and are hunting big game again.

After a period of quiet reflection following the go-go years that led up to the financial crisis, mega-deals are back. Debt is also cheap and plentiful, and banks are willing to back blockbuster deals that make sense.

But Tesla is no ordinary case. The company may be working on a genuinely world-changing idea but it is heavily loss-making and highly capital intensive.

Over the next decade, expansion is expected to require more than $30bn of fresh funding: $6bn on a production line for its Model Y, a crossover all-electric SUV due to be released in 2020; $18bn for a dealer network; and as much as $8bn for a charging network. Yet its current cash pile is forecast to run out some time in 2019.

Those sorts of eye-watering numbers will be hard for any private equity investment committee to get their heads around, while debt financing of any real size will be difficult to raise while cash flow is deep in negative territory.

That would leave it to a small handful of deep-pocketed sovereign wealth funds that are prepared to invest over a much longer time horizon until Tesla gets its house in order. The big-spending Saudis, which have just disclosed a stake, and Japan’s equally lavish Softbank fund seem the most obvious backers. Otherwise Tesla’s options look limited at best.

Perhaps there is a more simple explanation. Like many of the great visionaries, Musk excels at the big picture stuff. He can see things that us mere mortals struggle to envisage.

However, the minutiae is often a little harder to come by and while Tesla’s fanboys may be prepared to overlook such half-baked thinking, serious financial investors tend to be more discerning.

‘Much as Musk would love to inflict pain on his detractors, it would be a high-risk act’