When Elon Musk tweeted on Aug. 7 that he had “funding secured” to take Tesla private, it set off a global guessing game. Who has the cash to buy out Tesla shareholders? The price tag to to take the company private, even if Musk keeps his 20% stake as promised, could top $66 billion, going by Musk’s suggestion of a tender at $420 per share. (Tesla’s shares closed yesterday at around $370 per share.)
The suspects are few. Typically, the money would come from cash-rich companies or private equity funds with access to lots of debt, with the purchase arranged by multinational banks. Of course, nothing about this proposed transaction is typical. Tesla is a massive, money-losing electric car company. The company has not recorded an annual profit since its 2010 IPO. Most lenders back a major buyout only if there’s a reasonable reassurance of repayment. In most cases, that comes from the target company’s cash flow. Last year, Tesla burned through nearly $4 billion.
Tesla has promised profits later this year—it has broken such a vow before—and questions linger about its ability to execute its ambitious production plans without burning through billions of dollars. The electric car company, which has a market cap of around $63 billion, has raised some $38 billion in debt and equity to fund its spending since 2008. The company’s bonds now trade at 92 cents on the dollar. Analysts doubt the company can take on more debt.
So who does that leave as a prospective buyer? A handful of global companies have more than $50 billion in cash and other ready resources on their balance sheets, which could be put to use buying up Tesla’s shares. Only 11 fit the bill, according to data from research platform Sentieo.
A few of these could make intriguing offers. The most obvious is Apple, with a $243 billion war chest, which has tried and failed to enter the automotive industry before. Next up are Microsoft and Toyota, two less likely though still viable candidates. The problem with these, though, is that Tesla would remain part of a publicly listed group after a deal, which goes against Musk’s rationale for floating the buyout, as spelled out in an email to employees titled, “Taking Tesla Private.” The companies could, perhaps, contribute to a fund for buying out the car company instead, adding extra complications to an already convoluted proposal.
If these companies don’t step up, there are a few financial firms and sovereign wealth funds able to write checks of sufficient size. SoftBank and its Vision Fund, two of the largest sources of private cash out there at the moment, have been named (and dismissed) as possibilities, while sovereign funds such as Saudi Arabia’s certainly have the cash. But big foreign buyers, especially ones controlled by governments, could face opposition from US regulators wary of losing domestic control over America’s largest electric vehicle and clean energy company. There’s also the possibility of a consortium of players coming together, although 15 financial firms and tech companies told Bloomberg they had no knowledge of any financing arrangement in place for a Tesla deal.
But Barrett Cohn, co-founder of Scenic Advisement, which brokers private deals for Silicon Valley startups, says not to count anyone out just yet. “There’s a lot of gamesmanship,” he notes. Cohn predicts the Tesla deal will likely feature two syndicates pitching in about $25 billion each, with strong international participation.
If the deal does go through, it’s likely to be the largest and most complex buyout in history, says James Gelfer of PitchBook. For Tesla, Musk is proposing creating a special purpose fund that lets existing investors have the option of keeping their shares in the private company, or sell at $420 per share. That unprecedented arrangement would create a quasi-public entity with thousands of investors owning stakes in the private company that gives them a chance to buy or sell shares only every six months, according to Musk’s tweets. This could run afoul of US securities laws for many, many reasons.
Will the deal go through? Musk is confident. “Investor support is confirmed,” he tweeted. “Only reason why this is not certain is that it’s contingent on a shareholder vote.” But that’s note quite right. Tesla’s board of directors must sign off on the plan. The SEC is looking into the unusual and unexpected affair. And, most of all, a buyer must step forward.