Taking Tesla private: is it a pipe dream?

Saudi sovereign wealth fund money, the Public Investment Fund (PIF), is reportedly offering Elon Musk the money for Tesla to go private, to the sum of about USD $ 72 million. It supposedly has about USD $250 million in cash.? It is unlikely to be that easy. Nothing in Saudi Arabia, or the Middle East more widely, is as it seems. If a deal is secured could it be subject to a security review in the US?

This is what the Reuters correspondent in Riyadh, Andrew Torchia, wrote a few hours ago.

Saudi Fund may only play minor part in Musk's USD $72 billion Tesla plan- bankers

The fund is estimated to have over USD $250 billion in assets. But it is not that simple.

The Public Investment Fund (PIF) has many claims on its resources, both financial and political.

More than half of its assets are tied up in large Saudi companies whose stocks could be difficult to sell en masse.

The PIF has made substantial commitments to other technology companies or investments, including a $45 billion agreement to invest in a giant tech fund led by Japan’s Softbank.

Then there’s $3.5 billion invested in U.S. ride-sharing firm Uber, the $1 billion pumped into Virgin Group’s space ventures, and another $20 billion tentatively committed to an infrastructure investment fund planned with Blackstone.

There is also pressure to spend money at home, where a slumping economy has driven unemployment among Saudi citizens to record highs.

“They could handle part of taking Tesla private, but not necessarily a large part of it and certainly not all of it,” a banker at a major Gulf firm operating in Saudi Arabia said.

Musk has not put a formal buyout proposal to Tesla’s board, the company said on Tuesday.

The Tesla CEO has said he does not believe he would need to raise the full USD $72 billion value placed on Tesla by his USD  $420-a-share bid because he expects many existing shareholders – including himself with 20 percent of the company – to roll their shares into a private Tesla.

The Saudi PIF already holds about a 5 percent stake in Tesla.

Saudi Crown Prince Mohammed bin Salman, who heads the PIF, is driving to diversify the Saudi economy beyond oil exports by developing new industries. Participation in a Tesla deal could bring Saudi Arabia closer to developing a domestic car industry or playing a role in Musk’s electric battery manufacturing or space activities.

What Prince Salman, PIF managing director Yasir al-Rumayyan and other officials of the fund decide will be crucial to Musk’s take-private effort.

Musk said on Monday that al-Rumayyan had voiced support for Tesla going private and that talks with the PIF, along with other investors, were continuing.

Spokesmen for the fund, as well as Saudi government officials, have so far declined any comment on Musk’s statements. But bankers familiar with the secretive PIF said on Tuesday they had seen no sign yet of it preparing to commit to a Tesla deal.

ILLIQUID ASSETS

Those bankers added that although the fund is huge, many of its assets are not liquid and readily available cash is limited.

The PIF said last October that it had some USD $230 billion of assets under management, and analysts think this figure has now probably swelled to more than USD $250 billion, largely as a result of a rise in the Saudi stock market.

But stock exchange data shows USD $140 billion or more of the PIF’s assets are in big Saudi companies such as Saudi Basic Industries (SABIC) and National Commercial Bank.

These could not be monetized quickly without driving down prices in the local stock market, while selling many of them would conflict with another of the PIF’s declared roles, to helps Saudi firms “grow into regional and global leaders”.

Meanwhile, in Saudi Arabia’s illiquid market, selling real estate to raise money does not look like a near-term option.

“The PIF is not nearly as liquid as people might like to think,” an international banker who deals with the fund said.

However, the PIF may get two infusions of cash in the coming months and is seeking to raise between USD $6 billion and USD $8 billion in its first commercial loan, sources have told Reuters, adding that there was no mention of any acquisition linked to the debt.

And national oil giant Saudi Aramco said last month it was working on a possible purchase of a strategic stake in SABIC from the PIF. A complete purchase of the PIF’s 70 percent holding would give the fund about USD $70 billion.

Bankers expect the Aramco purchase to take at least several months to negotiate, however, and the PIF has already committed itself to large projects planned to stimulate the Saudi economy.

These include a USD $500 billion business zone in the northwest of the country, multi-billion dollar real estate developments in Mecca and Medina, and a huge entertainment area outside Riyadh.

“If it spends tens of billions of dollars overseas and the domestic economy is still slumping, it won’t look good to some Saudis,” the Gulf banker said.

 Taking Tesla private is a pipe dream

By Robert  Pozen-  14 August 2018

This article is from Brookings Brief but first appeared in Marketwatch.

Elon Musk is a brilliant entrepreneur and visionary, but the Tesla CEO’s vague proposal to take Tesla private at $420 a share is a sham.

The electric car company is struggling to service more than USD $10 billion of debt and make forecasted capital investments. Tesla TSLA, +0.39 percent is not likely to have anywhere near the free cash flow needed to support another USD $24 billion in debt to buy out even one-third of its current shareholders.

In 2017, Tesla generated USD $11.8 billion in revenue, but had negative cash flow of roughly USD $3.5 billion. That cash-burn hasn’t abated; during the first half of 2018, the company’s negative cash flow amounted to USD$1.8 billion.

Of course, Musk would argue that Tesla will soon become profitable by stepping up production of its Model 3 cars to 5,000 per week this fall, and to 10,000 per week by the end of 2018. But Musk’s predictions of car production have been frequently wrong.

Pile on top of these funding needs an additional USD $24 billion in debt to buy out one third of its shareholders — if Tesla is valued at USD $72 billion, as suggested by Musk. In theory, such a going-private transaction might be possible: Musk and insiders own 25 percent of the company, In addition, more than 40 percent of its shares could be retained by a relatively small group of institutional investors, if they would be willing to accept a severe reduction in liquidity when Telsa went private.

But in reality, who would loan Tesla another USD $24 billion?

The SEC is now investigating Musk’s assertion in his tweet on Aug. 7 of “Funding secure” for the going-private transaction. This assertion seems dubious since the largest Wall Street banks, such as JPMorgan and Citibank, were not aware of the transaction in advance of Musk’s tweet.

Moreover, Tesla’s junk bonds yielded above 7 percent in July, after being downgraded to Caa1 by Moody’s. If Tesla issued an additional USD $24 billion in bonds, those would have to pay a significantly higher interest rate — perhaps as high as 9 percent given the company’s iffy cash flow and heavy debt service obligations.

Indeed, Tesla’s creditors — banks and bond holders — should be worried about whether Tesla can pay off its current debt, given its shaky production history, negative cash flow, and sizeable cap-ex needs. They should be even more worried if Tesla takes on another USD $24 billion in debt.

At a USD $72 billion valuation, Tesla would be more than twice the size of the next biggest leveraged buyout in history. That leveraged buyout—USD $31.8 billion for TXU, a large Texas utility—resulted in bankruptcy in 2014, seven years after the buyout.

Complicating Musk’s vision is that Congress at the end of 2017 made leveraged buyouts less attractive by setting a new limit on corporate tax deductions for interest — just 30 percent of a company’s earnings before interest, taxes, depreciation and amortization.

Why is Musk putting forth the idea of a going-private transaction with such dim prospects?

After his tweet, Tesla circulated an email explaining his rationale for the proposed transaction. Musk maintains that, as a public company, Tesla is forced to take a short-term approach; by going private, Tesla will be able to focus on its “long term mission.”

While there are legitimate concerns about the short-term pressures on public companies, Musk’s motivation is disingenuous as applied to Tesla. Despite never having made a penny of profit, Tesla is valued above USD $60 billion — rivaling the market valuation of both Ford Motor Co. F, +1.43 percent and General Motors Co.GM, +0.97 percent. Why? Because many investors are willing to support Musk’s long-term vision for electric cars and overlook its current results.

In his email, Musk also mentions his dislike of short-sellers, who have bet heavily against what they believe is the unrealistically high price of Tesla’s stock. In fact, the total short interest in Tesla is one of the highest of any stock in the world. After Musk’s tweet, the price of Tesla stock jumped 11 percent — imposing huge losses on the shorts.

In my view, Musk’s vague plan for taking Tesla private is a pipe dream. I am deeply skeptical that Tesla will ever go private. Musk’s stated rationale for this proposal seems bogus, but his tweet did succeed in achieving one of his objectives — punishing short-sellers of Tesla stock — at least for now.

Robert Pozen has been a nonresident senior fellow at Brookings since 2010. In 2015, he generously committed to endow the Director’s Chair for the Urban-Brookings Tax Policy Center. Until 2010, Pozen was executive chairman of MFS Investment Management and, before 2002, served in various positions at Fidelity Investments. He did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. He is currently not an officer, director, or board member of any organization with an interest in this article.

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