Taking Tesla private would be the largest buyout in history — but maybe not much money would change hands

  • If Tesla goes private at over $US80 billion, it would be the largest buyout in history.
  • But we don’t know enough about a potential deal to rule out a less expensive strategy.
  • CEO Elon Musk could be thinking only about financing the possible exit of Tesla retail investors while converting institutional stakes into private shares.

It looks like Tesla CEO Elon Musk is serious about taking Tesla private.

Already, the gyrations among observers of the company have begun – for good reason, given that the deal would come in at north of $US80 billion if Musk’s $US420-per-share valuation is to be believed. That would be combined with Tesla’s existing debt.

Bloomberg’s Matt Levine has thrashed through the mechanics, such as they are. He basically hits on the salient issue, which is how Tesla current group of shareholders could transition from owning a public company to owning a private one:

So Tesla would be owned by the same number of shareholders, in the same proportions as now? But it would somehow be … private? I don’t … think … that’s how … any of this … like, if you have thousands of retail shareholders, you’re still giving them quarterly 10-Qs. That’s what being public means. It means being open to unlimited numbers of retail shareholders. And the securities laws, in their wisdom, say that if you do that then you need to give them quarterly earnings information.

Musk owns 20% of Tesla and says he isn’t selling. Big institutional investors such as Fidelity and T. Rowe Price own other major chunks. The Saudi sovereign wealth funds and China’s Tencent have about 10%. I doubt they’d be selling, either.

Retail investors have about 15%, and they could be key to how a deal gets done.

I’m gyrating myself here, but it sounds like what Musk wants to do is create a sort of bridge financing plan to shift major public shareholders and himself – 80% of the pie – to private status. If I work with round numbers and concentrate on just the equity piece of $US70 billion, assuming that only Tesla’s $US1.8 billion in junk bonds could be tricky, then that takes care of around $US56 billion in public value.

That’s assuming all the big investors think $US420 per share is too low and would be willing to hang in there for the long term.

So Musk only needs to finance $US14 billion on the equity side to buy out 100% of whatever skittish retail investors might want to exit.

That looks much less intimidating than $US80 billion.

I’m not financially deep-dish enough to know how $US80 billion in financing would need to be generated for, say, a day or two to facilitate the transaction. I’m pretty sure some type of vehicle would need to be legally established.

This pretend money would I guess by agreement value Tesla at $US420 per share. The risk would be that every retail investor dashes, but that seems unlikely, especially if the major shareholders consent to the deal and the Tesla board approves it. Follow the leaders.

At that point, Tesla’s ongoing value would be gauged by follow-on investment in some kind of special fund, whatever happens with its debt (Maybe it all gets paid off via some additional financing?), and the frequency and scale of transactions in the private markets, which Musk suggested could be six-month “liquidity events.”

What makes this work, potentially, is the size of Musk’s and his big investors’ stakes relative to the deal size. Presumably, all or most have to go along with the idea. Short-sellers would have to cover up to the buyout price.

Yes, this all sounds quite crazy. But also doable.

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