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Will Elon Musk really take Tesla private?

Tesla shares gained 11% yesterday after chief executive Elon Musk said he had “funding secured” to take the electric vehicle maker private at $420 a share. Is this likely?

by
Garry White

in Features

08.08.2018

Elon Musk is not your normal chief executive, but events of the last 24 hours are unusual even by his standards. Shares in his electric vehicle company Tesla, of which Mr Musk owns 20%, were already rising on Tuesday following a report that Saudi Arabia’s Public Investment Fund (PIF) has built a significant stake of between 3% and 5% in the company. However, these gains were turbocharged after Mr Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.”

Some have suggested that this may have breached the Securities and Exchange Commission’s (SEC) fair disclosure rule. “Regulation FD” addresses the selective disclosure of information by publicly-traded companies. If material non-public information is disclosed, the issuer must make public disclosure of that information. “One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information,” the SEC says. However, Twitter has already been shown to be acceptable method of disclosing such material in what is known as the “Reed Hastings Rule”.

Reed Hastings is the chief executive of Netflix. The SEC looked at a Facebook comment he made in 2012 that declared the video-streaming service had exceeded one billion hours in monthly viewings for the first time. Netflix did not report this information to investors through a press release or Form 8-K filing, and a subsequent company press release later that day did not include this information. In 2013, the regulator concluded that listed companies could use social media outlets such as Facebook and Twitter to announce key information in compliance with Regulation FD, as long as “investors have been alerted about which social media will be used to disseminate such information”. Mr Musk’s frequent use of Twitter to disseminate information and rebut the arguments of short sellers would certainly be a defence in this matter.

However, others saw the tweet as problematic from another perspective. Harvey Pitt, a former chair of the SEC, said that if the purpose of the tweet was to boost the share price, it would be considered securities fraud. He said the move was “highly unprecedented” and raised significant question about “what his intent was”. Indeed, the “funding secured” comment could be an issue for regulators. In a blog post after the statement he did not explain how the buyout, if real would be funded.  

Although disclosure requirements can be an annoyance, the whole point of being a listed company is to gain easier access to funding. It remains unclear which investors would buy a loss-making company valued at north of $70bn.

Last week, Tesla announced losses of more than $700m for the second quarter, but Mr Musk said results would improve as the year progressed and he saw the company moving into sustainable profitability in the second half of the year. He also said that the group did not need to raise money and said the company could be making a million cars a year by 2020. “If it's not a million it is going to be pretty close. I would say if it is not a million it will be 750,000 or something like that,” Mr Musk added. General Motors managed to produce 9.6 million vehicles last year.

Mr Musk also said that the company, which has negative cash flows, would not have to raise any more money, despite burning through $739m in its latest quarter. He also said he expects to be able to use cash flow to repay around $900m of convertible debt maturing early next year. Total long-term debt stands at about $9.5bn.

Of course, Mr Musk has made cash flow and production target predictions before – and they have not been met. Rational investors may like to take his comments with a pinch of salt until proof of such funding is forthcoming. The stake by PIC is certainly an interesting development and there has been lots of speculation that Apple may be interested in the company. The iPhone maker is rumoured to have its own electric vehicle research group called “Project Titan” so a purchase would not be entirely off the wall.

In an email to employees late yesterday Mr Musk conceded that the decision wasn’t final. Whatever the truth in this case, as an investor, this does not feel like an appropriate way to put market-moving information into the public domain. However, following the Reed Hastings Rule, it may be something we need to get used to.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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