Elon Musk has a lot of big, ambitious plans, from colonizing Mars to sticking battery packs tethered to solar panels in every home. Trouble is, each of these dreamy projects costs a fortune, and fortunes are not easy to come by – especially when you are losing a fortune every minute of the day.
Take Tesla, his electric car company. Its cash burn is horrendous. In the first quarter of this year, US$1-billion went up in smoke; in the second quarter, the figure was US$739-million. In an article published on April 30, Bloomberg calculated that Tesla was going through US$7,430 every minute, around the clock, as it sells cars at a loss, adding that the company could run out of money this year, a scenario Mr. Musk denies.
Mr. Musk, Tesla’s chairman and chief executive, seems trapped in an endless, vicious circle of burning fortunes and raising fortunes to keep the whole show rolling. But unless he can prove that Tesla can become sustainably profitable – the company reported a net loss of US$717.5-million in the past quarter – investors will either walk away or make it ever more expensive for him to tap the equity and bond markets.
Which brings us to the Saudis. Last week, by way of a tweet, Mr. Musk announced that he was considering taking Tesla private at US$420 a share and that funding for such a deal was already “secured.” By then it had emerged that the Saudi Arabian Public Investment Fund had bought just short of 5 per cent of Tesla’s Nasdaq-listed stock. Mr. Musk later confirmed that he had started talking to the Saudis about taking the company private almost two years ago.
At US$420 a share, removing Tesla from the stock market would cost as much as US$70-billion, and you can bet that neither the Saudis nor any other institutional or sovereign investor is going to pay anywhere near that price, given Tesla’s cash situation and the US$9.4-billion of outstanding debt it carried at the end of 2017 – its share and bond performance say as much. By the end of the week, Tesla shares, which had popped up 10 per cent after Mr. Musk’s tweet, had slid to US$306. The 5.3-per-cent bonds, due in 2025, were trading at a yield of slightly more than 7 per cent, putting them firmly into “junk” territory.
If the funding for a privatization at US$420 a share is in place, the equity and bond holders are evidently not aware of it.
But didn’t Mr. Musk insist that the funding was locked and loaded? He may have jumped the gun. There is no deal that anyone is aware of. The U.S. Securities and Exchange Commission has hit Tesla with a subpoena as part of its investigation of Mr. Musk’s tweet and its accuracy – or lack thereof. Tesla is one of the most heavily shorted stocks on the market, and the short-sellers, who were trembling with fear last week when Mr. Musk floated the US$420 figure, may yet live to see a big payoff.
The Saudis have time on their side and can watch Mr. Musk squirm as Tesla eats into its dwindling cash pile, which stood at US$3.4-billion at the end of 2017. Barclays has forecast that Tesla will consume US$4.2-billion this year. The company also has debts coming due – US$320-million in November and US$920-million in March, according to Moody’s. Although Mr. Musk has stated repeatedly that Tesla does not need to launch another debt or equity round this year, as sales of the mass-market Model 3 sedan finally pick up after a slow start, his view is not universally shared among investors and analysts.
The Saudis do not move quickly. Crown Prince Mohammed bin Salman revealed more than two years ago that Saudi Aramco, the world’s biggest oil company, was prepping itself to join the stock market. It has yet to do so. The Saudis needn’t worry about competing with Chinese funds to take Tesla private. Given the animosity between U.S. President Donald Trump and Chinese President Xi Jinping, it’s impossible to imagine that the White House would sanction the sale of one of America’s premier tech companies to the Chinese.
If Tesla proves that it can make a profit, there is a chance that the privatization will come with a fat price, though probably not as high as Mr. Musk’s mooted US$420 a share. The chances of that happening in the near term are slim. The company has reported negative free cash flow for the past seven quarters. In the past four years, its only profitable quarter came in 2016, when its bottom line was boosted by the sale of US$139-million in zero-emission vehicle credits. Since then, almost every automaker of consequence has dived into the electric car pool, meaning Tesla can no longer count on zero-emission credits to save the day. Until a couple of years ago, it owned the high-end electric car market. With the Europeans coming on strong, Tesla will struggle to stay on top.
Mr. Musk will find a price to take Tesla private. But that price is almost certainly not what he wants. A company burning cash to the point its viability is in question cannot be worth 25 per cent more than the current market value, which is higher than either GM’s or Ford’s.
Eric Reguly