@sesevans ^ That's a great post and you obviously know an awful lot about corporate finance.
The bit I'm missing here, and this by contrast is probably showing my relative lack of knowledge on the subject, is why Tesla Plc doesn't first repurchase and cancel the publicly-available shares at the current price, if Musk believes that the current share price undervalues the company and is due to short selling Tesla bears.
Seems to me that bOrn2sk8 is spot on. Supply and demand. Musk is simply not in a position today to "repurchase" the shares, even if he could do it at current prices which as suggested is not likely. Also even if it were possible, it would be seen by the market in my view as a lack of confidence in Tesla's future to offer no premium. At the proposed price of $ 420 per share, a completed LBO would, I believe, be the largest ever (in excess of $ 70 billion).
Why is Musk unable to repurchase even if everyone were to tender shares to Tesla at current prices? Tesla simply does not have the cash on hand nor the capacity to raise that much additional debt without assistance from third parties, hence the need for the LBO structure. Most analysts believe Musk is short of cash. Prior to yesterday's LBO news, he has disagreed saying that to run his operations in the near future he expects to be generating cash without the need to borrow. To need $ 2 billion to finance expansion is one thing. To need $70 billion is a totally different ballgame requiring creative thinking.
Incidentally, since the announcement yesterday, Tesla bonds have rallied. Equity short sellers have incurred significant losses recently.
Trump would put the brakes on this I would have thought, the UK defence industry might be croniee to the saudi's for their money, but is the USA as sychophantic;
other investors would be out of Tesla if they thought Saudi oil/petrol concerns might be biassing their investment decisions ?
I thougth a lot of the Tesla funding was also junk bonds, so do those 'investors' not have a say
Titans of Junk:
I may have been unclear about the Saudi involvement announced yesterday. The Saudi Wealth Fund has recently accumulated Tesla shares in the open market, at market prices, and its stake is worth perhaps $ 2 - $3 billion at today's price. They own less than 5% of outstanding shares so they are a purely passive owner today.
You raise an interesting question however about how Tesla would fund the Musk led LBO however. Assuming a classical structure of 70% debt and 30% equity and assuming a successful deal is reached at $ 420 per share or a total transaction value of $ 75 billion, the amount of new debt required would be approx $ 52 billion and the new equity slice would be the balance of $ 23 billion. I note that according to Bloomberg today, Musk held discussions with Softbank last year about a major investment but nothing happened. Your point about non-US control of Tesla is well taken in the current America First environment. I do not see that happening. CFIUS is a strong barrier. Having said that, I still see lots of risks ahead in pulling off this deal---we are talking huge numbers in LBO terms and I question the thinking of any strategic buyer to justify the numbers based on current Tesla prospects. But perhaps there is more at play than I can clearly see now. In my earlier post, I alluded to Tesla Mobility, the EV autonomous vehicle business adding value to a strategic buyers thinking. Maybe there is a lot more to Tesla value than meets the eye.be
If you assume that Tesla is able to attract strategic capital that has not been available to it to date, you probably are assuming that the best time for Musk to pull this off is now. As I mentioned in my earlier post, Tesla is in a sweet spot now which may change in a couple of years time. Now they are the only EV manufacturer capable of producing a few hundred thousand EVs per year and they will probably enjoy this advantage for at least another two years. Investors are assuming I believe that Tesla is in the best position it has ever been in to ramp Model 3 volumes. Hence I think is why Musk is attempting to arrange this deal now. Perhaps in two years, VW will be a very strong competitor, for example.
Finally in the interest in figuring who might be an interested strategic buyer to join Musk in this venture, I suggest Google, who are investors in SpaceX, a venture that has the potential to mesh well with Tesla over time. Could Google see a benefit for Waymo to have its EV fleet of cars and trucks be designed and manufactured together with Tesla or might it continue to work better with many others?
thing is autonomous vehicles are already here,
they've been running HGVs up and down the M8 in full autonomous mode for over a year now. granted its all motorway work and its RDC to RDC so fixed point to fixed point every day and theres a driver in the cab at all times but it works .
autonomous vehicles don't get tired, dont get distracted and don't make mistakes nearly as often as their human counterparts.
theres a nationwide shortage of hgv drivers, now I don't know if they would let them run fully autonomous or maybe allow a truck in autonomous mode to be driven longer by a driver between breaks who knows but their here and working.
That is really helpful to know. My sense was that the UK autonomous vehicle development was being constrained to some extent now by EU protocols. I suggest that if the tech is fully up to it, post Brexit they might be better able to conduct more and varied testing on public roads.
@sesevans ^ That's a great post and you obviously know an awful lot about corporate finance.
The bit I'm missing here, and this by contrast is probably showing my relative lack of knowledge on the subject, is why Tesla Plc doesn't first repurchase and cancel the publicly-available shares at the current price, if Musk believes that the current share price undervalues the company and is due to short selling Tesla bears.
Thinking some more about your post and my comments about how Tesla is considering asking its existing shareholders to maintain their holdings in a "Tesla Private Company", I have looked at the shareholder base to consider how feasible this is.
Here is what I considered:
Total number of Tesla shares outstanding: 171 million
Current market value based on $ 370 share price: $ 64.75 billion
Public float: 127.5 million shares
Institutional ownership: 62% of public float or 79 million shares
Top 5 institutional owners hold 56 million shares at 31/3/18
Elon Musk total share ownership: 33.7 million shares or 19.7% of total shares
Elon Musk has stated that he plans to continue to own his shares after the LBO. If he can convince the Top 5 institutional owners to continue their ownership in Tesla Private Co, that means that 52.4% of all equity holders are prepared to convert their public ownership into private ownership. Insider ownership accounts aside from Elon Musk accounts for another 10 million shares (approx 5.7% of total shares) and it is not known what the view of these holders would be under the new structure.
I can see a scenario where approx 50-60% of all current public share ownership convert to the private structure, meaning that the task to find new equity buyers for the balance is doable. As to the huge amounts of debt required (I estimated $ 52 billion previously), clearly it would be better for Tesla's capitalisation if the new debt needed were reduced by greater new equity.
Returning to Tesla's current financial situation, a higher share price triggered by a proposed $ 420 million buyout price has a couple of additional benefits for Tesla:
1. Tesla has a $ 920 million convertible bond coming due in March 2019 at a conversion price of approximately $ 360 per share. If Tesla shares are below this price next March, Tesla would have to find the cash to buy back the bonds. If Tesla shares are above this price, the bonds convert into equity and spare Tesla a use of cash.
2. At 30/6/18, Tesla cash held was $ 2.2 billion. For the first 6 months of 2018, Tesla free cash flow was a negative $ 1.8 billion.
People will be asking why Tesla announced the "take private" decision now and how Tesla handled the announcement. The SEC has already begun to inquire about the facts surrounding Tesla's announcement.
Hope this helps with the discussion.
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