Where is the ‘420’ Money Coming from Elon?
Tuesday, Elon Musk did not just say he was considering taking Tesla private Tuesday. He said the funding to do so was “secured.”
No one knows what that means.
And even while Musk and Tesla have clarified some of the questions behind Mr Musk’s surprise offer, the mystery of where the funding would come from remains a mystery.
Even at the height of the frenzy following Mr. Musk’s Tweet, the share price never approached the amount offered, that is a sign that the market is skeptical he can or will follow-through. There is extreme risk in here.
What we do know is this.
These companies are not involved in the ‘420’ financing; Apple, SoftBank, Uber, TPG, Silver Lake, Mubadala, KKR plus basically every large Wall Street bank.
CEO Musk said he would offer 420/share for the company, which would give the company a market cap of over $71-B. Throw in the debt, and the deal gives Tesla an enterprise value of around $82-B.
One source of funding could be Elon Musk himself. He owns about 20% of the company and has said he expects his stake would not increase in the transaction.
That sounds like he’s planning on converting his shares of Tesla into shares of the private investment fund he mentioned would be open to current shareholders. Subtract his stake and Tesla needs $57-B to take out the equity.
Let’s putt aside the possible legal objections the structure
It is likely that a significant portion of shareholders would opt into the investment fund. If they are holding shares at the current valuation, many of them are clearly Bulls on Tesla’s future, and they do not want to be locked out of future gains. And for many investors there’s likely a significant capital gains tax advantage to converting rather than taking the cash. If one take the cash, one then owes tax payments on your capital gains and be locked out of Tesla forever. If one takes the conversion, one will not face a tax bill and one will still get to dream of EV wealth at night.
The Tesla investment fund is not without its downside.
The fund will be illiquid and nontradeable. We can expect that the structure would allow investors some opportunity to exit at approved times or under certain circumstances. Investor rights and access to information will likely be very tight. As 1 of Mr. Musk’s goals is to get out of Quarterly reporting.
The Top 10 institutional investors in Tesla collectively own about 39.6%. Many of them are permitted to invest in private companies. It is possible that Mr. Musk has talked to these investors and received assurances that they would convert into the private fund. That would be the equivalent of providing around $28-B of capital to the take private deal, that is about $50% of what he needs.
The Big Q: Where will the rest of the money come from?
The Big A: 1 possibility is cash-laden American tech companies.
A company like Apple could see this as a path into the “car of the future” race with Google, Uber, and others. Except that it is confirmed it is not Apple.
Google parent Alphabet could also be an investor.
Hardware companies could look at this as an opportunity to partner with a company that is already making “smart cars.” Microsoft, Cisco, Oracle, Qualcomm, and Intel all have significant amounts of cash on their balance sheets.
And another possible source of funds: sovereign wealth funds.
Tesla might be attractive to funds whose wealth is Crude Oil-based. Tesla would allow them to participate in the upside of electric cars and solar power that is a threat to Crude il wealth. The Saudis recently bought $2-B of Tesla, according to media reports. Funds from all over the GCC region are likely to want to follow. Norway’s gigantic $1-T pension fund is hugely vulnerable to a turn against Crude Oil, so diversifying into EVs might make sense.
China has a huge amount of cash in its sovereign wealth fund.
It is reported that Mr. Musk recently struck a deal to build a factory in China, and no one knows where the financing for that is coming from.
It could be that the notion of taking Tesla private has already been broached with the Chinese. But this might provoke backlash from US regulators, although as long as the Chinese fund does not acquire too big of a stake, it is unlikely it would be blocked.
This is all just speculation, but it does demonstrate that it is not impossible for Mr. Musk to raise the funds to take Tesla private even if he has to do it without borrowing.
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