Musk tries to rewrite the rules of private ownership

Musk tries to rewrite the rules of private ownership

Joshua Franklin and Heather Somerville

Billionaire investor Elon Musk has always done things his own way, from designing space rockets to manufacturing electric cars.

Now the Tesla CEO is looking to re-engineer how a company can be taken private.

Mr Musk announced on Twitter on Tuesday that he was considering taking Tesla private for $420 per share, or $72bn (€62bn), in what would be the biggest deal of this kind. He said the funding for the deal was secured, but did not provide details.

Tesla shares ended up 11%, indicating investors gave some credence to the plan.

But investment bankers and analysts reacted with scepticism, telling Reuters it would be hard for Mr Musk, whose net worth is pegged by Forbes at $22bn, to raise the equity and debt financing needed for the deal given Tesla is not turning a profit.

“The company is cash-flow negative. How do you use any debt on a company that is cash-flow negative?” said Steven Kaplan, a University of Chicago professor who researches private equity.

Finding equity partners and bank financing is key to take-private deals. When Michael Dell took his eponymous computer maker private for $24.9bn in 2013, for example, he brought in buyout firm Silver Lake that contributed $1.4bn in equity, raised more than $10bn in bank debt, and received a $2bn loan from Microsoft.

When a Twitter user commented on Mr Musk’s proposed deal by posting “Just like Dell did. It saves a lot of headaches”, Mr Musk responded by tweeting “Yes”.

Dell’s take-private deal, however, may not be possible to replicate with Tesla, which has a $10.9bn debt pile, is losing money, and whose bonds are rated junk by credit ratings agencies.

Without the ability to add more debt, Mr Musk may have to turn to sources of capital that are less accustomed to using debt to juice returns in the way private equity firms are.

One option could be sovereign wealth funds, investment bankers said.

Saudi Arabia’s Public Investment Fund (PIF) has taken a stake of less than 5% in Tesla, according to one source. PIF did not respond to a request for comment on whether it would bankroll Mr Musk’s take- private deal.

SoftBank’s $93bn Vision Fund, whose investors include the sovereign wealth funds of Saudi Arabia and Abu Dhabi, is seen as an obvious partner given its appetite for big technology investments, but was not contacted by Mr Musk and is not interested in a deal given its investment in Tesla competitor Cruise, the self-driving car unit of General Motors, according to a source.

China’s Tencent Holdings, which took a 5% stake in Tesla last year, is another possible partner.

However, foreign capital sources would be subject to scrutiny by the Committee on Foreign Investment in the US, which reviews deals for potential national security risks.

Any proposal for funding from Chinese firms could face even tougher checks amid mounting US-China trade tensions.

Many attempts by founders and top executives to take their companies private have never come to fruition.

In March, Qualcomm chairman Paul Jacobs stepped down from the board to pursue a long-shot take- private bid for the US chip maker, which has a market capitalisation of $93bn. To date, this bid has not materialised.

US department store operator Nordstrom’s attempt to go private also failed earlier this year, after banks balked at providing the necessary financing to the founding family members seeking to put together the deal.

Mr Musk has said he would be looking to keep his ownership of Tesla at around 20% and that a special purpose vehicle, like the one that exists at his aerospace company SpaceX, would allow Tesla shareholders to remain invested if they so choose, and then cash out when they wanted.

But sources familiar with SpaceX told Reuters it is not clear how Mr Musk would apply it to Tesla.

Fidelity Investments, the major backer of SpaceX, did not invest in the company through a special purpose vehicle, according to the sources.

SpaceX only has a limited number of shareholders, who often choose to sell on their shares in the private market.

By contrast, allowing thousands of Tesla shareholders to remain invested through a special purpose vehicle would essentially mean that shares in that new vehicle are publicly traded in some way.

Even if such a deal was cobbled together, it is not clear whether so-called “liquidity events”, that Mr Musk said he organises at SpaceX every six months, would be sufficient for all existing Tesla investors to cash out.

“To have a deal of this size, that’d be unprecedented as far as I can remember,” Mr Kaplan said.

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