Tesla needs some major cash to stage a $60+ billion buyout to take the company private.
Last week, Elon Musk announced in a tweet that he was considering taking the company private. In an e-mail he sent to company employees, he mentioned that a final decision had not yet been made. However, he stressed the buyout is necessary to build the best operating environment as Tesla ramps up production. “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders.” Now, it appears that Saudi Arabia’s sovereign wealth fund may back Tesla for at least part of the buyout.
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
The Saudi government plans to turn the fund – called the Private Investment Fund (PIF) – into a $2 trillion behemoth to diversify the country’s current oil-reliant status. To that end, the fund is exploring how it can build a larger stake in Tesla. According to anonymous sources speaking to Bloomberg, the PIF will meet with Tesla’s board to discuss the matter. Currently, the fund holds about a 5 percent stake in Tesla – or about $2 billion.
However, Musk is hoping to avoid having just one or two large investors involved in the estimated $82 billion buyout needed to take the company private. Even if the PIF does invest further, Musk will needs to tap other investors to raise the cash. Musk currently holds around a 20 percent stake in Tesla. After any buyout takes places, he still expects to own around 20 percent of the private company.
Legal issues mount as possible Tesla buyout moves forward
At least two investors sued Musk and Tesla for the way Musk announced the discussion to take the company private. In another tweet, Musk states that shareholders could either sell out at $420 a share, or hold on while the company goes private. Tesla stocks shot up over 10 percent upon the announcement. The lawsuits allege that Musk was manipulating share prices with the news. He is also under scrutiny from the U.S. Securities and Exchange Commission in connection to his original tweet. The SEC is examining whether his tweet was factual, and he did indeed have funding secured when he made the announcement.
Sales are still the make-or-break issue
While Tesla has undergone significant debt, its key goal is to ramp up production, particularly of the Model 3. At this point, the company needs the revenue it generates from sales to remain viable. According to Nannan Kou, a senior Bloomberg associate, “The question is still around Tesla’s sales. At this stage it is hard for Tesla to convince the general investors that delivery will ramp up quickly. So the potential investor must be patient and strategic-looking.” He went on to describe the company’s predicament as “essentially a chicken-and-egg problem”.
It is not immediately clear how much the PIF may invest in Tesla. The Saudi fund hasn’t made a decision on if it will increase its stake in Tesla, or by how much. It is also unclear what other investors may be interested in backing the company’s buyout to become private again. The decision to take the company private, with whatever investment Musk and the board can secure, ultimately depends on a shareholder vote.