Privatization would help Tesla Inc. keep its focus on a more distant horizon and enable a fundamentally competitive company to escape detrimental, short-sighted stock market scrutiny, analysts said on Aug. 9, especially as doubts grow about the temperament of CEO, who galled traders by revealing such a plan on Twitter.
Elon Musk stunned investors with his Aug. 7 trading day tweets announcing his desire to take Tesla private and saying he had "funding secured." The company's board said Aug. 8 that Musk opened a discussion about taking the company private the week of July 30 and it is now evaluating the possibility.
Analysts cautiously welcomed the news, saying privatization would enable Tesla to keep its focus on the horizon and escape the hot-button mentality of the stock market, which tends to focus on short-term metrics. Over the prior 12 months, Tesla's stock added 1.87% while the NASDAQ Composite Index grew 24.18%.
"I take it seriously," said Washington, D.C.-based Jamie Albertine, senior automotive analyst at Consumer Edge Research, of Musk's proposal. In an interview, the analyst highlighted the growing demand for "competitive" Tesla products and its expansion plans as pluses for a company whose debt is rated "junk." S&P Global Ratings has a B- rating on Tesla's local and foreign-currency debt with a negative outlook.
The move would end the public squabbling between enthusiastic Tesla "longs," those staying the course with their investments in the company's shares, and doom-mongering short sellers, amid high uncertainty about the company's finances, Albertine said.
"What we have found in conversations with investors is that they are more entrenched than ever, and unwilling to capitulate," Albertine said, speaking of both types of investors. "To that end, the public markets don't seem to be serving Tesla as well as they should be."
The Wall Street Journal reported on Aug. 8 that the U.S. Securities and Exchange Commission has inquired directly about Musk's revelation of materially-relevant information via Twitter and the veracity of his take-private claim, according to anonymous sources, is likely to give the doubters more fodder until Musk can silence them by identifying interested investors.
An SEC spokesperson said the agency was declining to comment on whether an investigation is underway and its website states that all investigations are conducted privately.
While analysts outlined the implications of privatization, fundamental doubts about the entire idea were also apparent.
In a research note, UBS analysts Colin Langan and Gene Vladimirov noted that such a transaction "would likely require participation from numerous banks and institutional investors."
"[W]e think it likely that news of the deal would have leaked had Tesla already held discussions to secure funding," the analysts continued.
Brian Johnson at Barclays Capital said in his own research note that the buyout would require $70 billion, including $10 billion to eliminate debt, though Musk said he hoped existing stock investors would carry their shares over into a special-purpose vehicle, so the figure could be less if there were shareholders interested in such a plan.
With two sedans and an SUV already on sale and more products in the pipeline, Tesla's next big project is to build a car factory in Shanghai for the lucrative Chinese market — a plant it plans to fund with locally sourced loans. The company remains highly levered, with total debt outstanding of $13.41 billion as of June 30, according to S&P Capital IQ, but it plans to pay off around $900 million this coming due early next year.
Though analysis of the potential transaction attempted to decipher Musk's thinking, with many heaping a good deal of skepticism about his claim to have raised funding, guesses were few as to what Musk could possibly gain by making a claim he could not publicly validate, especially given the positive reception garnered by the company's recent, stronger second-quarter earnings report.
"As surprising to us as these developments are, and as lacking as the statements are in any details regarding who is expected to provide the required amount of financing and on what terms, they are nevertheless declarative statements from the CEO of a public company which we feel should be considered seriously," J.P. Morgan analysts Ryan Brinkman, David Kelley and Aayush Gupta said in a research note.
Musk's judgment and leadership has recently come under scrutiny after he dismissed "bonehead questions" from analysts on an earnings call and a highly-publicized exchange of insults with a British diver on Twitter.
He apologized for his behavior during his company's second-quarter earnings conference call, ingratiating himself among investors but leaving them wary about his temperament, misgivings not helped by his latest tweets.
If a privatization deal does proceed, Albertine said it would be unlikely to take place for several months, until the improvement in Tesla's finances gains a firmer footing with the company, which is yet to turn a profit. The company posted a normalized net loss of $520.2 million in the second quarter, though it said it expects "to achieve GAAP profitability" in the third and fourth quarters.
"We think any reasonable expectation of a go-private transaction would require Tesla to show some form of profitability or show improvement into a cash flow positive state prior to investors underwriting the transaction," Albertine said.
S&P Global Market Intelligence and S&P Global Ratings are both units of S&P Global.