Tesla’s New Take-Private Plan: Never Mind
Elon Musk's dubious buyout scheme is over before it started—if it existed at all.
CEO Elon Musk stunned the world again late Friday night with the announcement that he has decided, with full board support, that Tesla (TSLA) is “staying public.”
He explained:
Large Tesla investors told him they wanted the company to remain publicly traded—which he would have learned had the idea been comprehensively explored and vetted as it should have been before he blurted his idea out to the world on Twitter.
He also had come to learn the take-private process actually would be “challenging,” “distracting,” and take longer than he thought to accomplish, and he’s just too busy what with the ramp-up on the Model 3 and all. Imagine that.
The news was announced via a press release tagged to a tweet.
Of course it was.
Whatever he might think, Musk has decidedly not settled the affair. Fallout from the calamity he created has hurt his company and all its stakeholders, including Tesla’s customers, suppliers, and employees as well as investors.
It also has inflamed already growing concerns that Tesla could be headed to bankruptcy unless it can quickly resolve serious near-term pressures, including ominous debt maturities that threaten to deplete its rapidly eroding cash.
Such intense scrutiny--and what it might have revealed--may also have helped sour Musk on his take-private plan. In any case, Musk and Tesla’s board, startlingly complicit via its negligence over the past year in reigning in Musk’s increasingly erratic behavior and actions, now face years managing perhaps prohibitively expensive consequences.
In the meantime, I haven't been distracted from what looks like trouble brewing as I projected in third-quarter and full year profitability, cash flow, and liquidity, trends which seem to be tracking much lower than expected performance versus Musk's ambitious guidance and market consensus estimates.
No Do-Overs
Musk’s change of mind doesn’t put the genie back in the bottle. A survey of some of the more obvious consequences of his escapade shows he:
Triggered a tsunami in volatility for investors in Tesla, resulting in a swing and then evaporation of some $13 billion in market cap for the company as the stock plunged to as low as $300 per share (see chart above) before recovering somewhat to $323 as of Friday's close. That's down 6%—$3.3 billion lost in market cap—versus where the stock closed the day before Musk's shocking announcement via tweet that he wanted to take Tesla private with "funding secured."
Attracted new SEC investigations and shareholder lawsuits that will expensive to defend and settle and take years to resolve.
Generated increased scrutiny on Tesla’s struggling operations, which also has revealed its increasingly strained relationships with vendors and customers.
Heightened already healthy skepticism regarding Musk's encouraging declarations and often repeated guidance that Tesla is poised to generate its first-ever profit and positive cash flow, thereafter on a sustainable basis.
Damaged Tesla’s ability to seek willing and affordable support in capital markets and with potential equity partners for what I have outlined as creative solutions that may be necessary to ease the company’s near-term liquidity pressure. One idea I have suggested, for example, is Tesla could offer a generous consent solicitation to holders of some or all of Tesla's convertible bonds to persuade them to accept stock now instead of cash—slashing Tesla's cumbersome debt and near-term cash obligations.
Eyes On The Road
While I share the market's alarm with Musk’s stunningly poor and increasingly frequent management missteps, I have remained focused on Tesla’s troubled operations and near-term threats.
I warned in my last report Tesla Take-Private Plan: Shoot First, Answer Questions Later (If at All) that Tesla is likely struggling more than expected, with performance perhaps meaningfully weaker versus Musk’s ambitious guidance and market consensus estimates for the third quarter and second half. If so, this could threaten Tesla’s already pressured liquidity ahead of hefty near-term maturities. I’ll explore this in more detail in an upcoming report.
I have suggested that such troubling trends would likely have been clear to management, then roughly midway through the third quarter, when Musk announced his farcical take-private scheme.
If so, Musk may have believed that good vibes over his brilliant plan would outweigh backlash over missed guidance and support his grand idea that he and the company should be unchained from the horror of public scrutiny and accountability for performance and disclosures that go with being a publicly traded company. Given his very publicly expressed musings and emotional meltdowns with the press, he clearly thought we would all understand.
He thought wrong.
Maintain “Underperform” rating on TSLA 5.3% Senior Notes due 2025; last seen at 87.2 (7.6% ytw; 480 bps)—down roughly 3 points since my 8/15/18 report in which I warned of a 3-5 point downside if Tesla falters before any take-private plan materializes. Still accelerating risks could translate into 3-5 points additional downside from here.
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