MarketWatch published an opinion piece recently titled “Elon Musk’s Plan to Take Tesla Private is a Pipe Dream” which alleges that the Tesla CEO’s plan to take his electric-car company private is extremely unlikely to go ahead.
The opinion piece, published by MarketWatch, was written by Robert Pozen, a senior lecturer at the MIT Sloan School of Management and a senior non-resident fellow at the Brookings Institution. In the article, Pozen claims that Musk’s proposal to take Tesla private once shares reach the price point of $420 a share “is a sham.”
Pozen notes that Tesla is currently struggling to repay $10 billion in debt and make its forecasted capital investments and is therefore extremely unlikely to have the positive free cash flow needed to buy out even a small portion of its investors.
Pozen states in the article:
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.
Moreover, assuming optimistically that Tesla meets these higher production targets, Goldman Sachs estimates that the company would still need $3.6 billion in new funding in each of the next two years. These funds would be needed to absorb operational losses, sustain capital spending, and replace $1.8 billion in debt maturing by the end of 2019.
Pile on top of these funding needs an additional $24 billion in debt to buy out one third of its shareholders — if Tesla is valued at $72 billion, as suggested by Musk. In theory, such a going-private transaction might be possible: Musk and insiders own 25% of the company, In addition, more than 40% 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 Pozen believes that the chances of someone loaning Tesla another $24 billion are extremely slim. Pozen further notes that a leveraged buyout of Tesla’s shareholders would be more than twice the size of the next biggest leveraged buyout in history.
At a $72 billion valuation, Tesla would be more than twice the size of the next biggest leveraged buyout in history. That leveraged buyout — $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% of a company’s earnings before interest, taxes, depreciation and amortization.
Pozen notes that while Musk’s tweets about taking Tesla private may not come to fruition, they did perform some service for Musk in the act of punishing short-sellers.
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 $60 billion — rivaling the market valuation of both Ford Motor and General Motors. Why? Because many investors are willing to support Musk’s long-term vision for electric cars and overlook its current results.
Read the full article in MarketWatch here.