Here's what four experts are saying on Tesla potentially going private 15 Hours Ago | 01:49
Tesla CEO Elon Musk stunned investors Tuesday with a string of tweets saying he is considering taking the company private, in what would be the largest deal of its kind.
"Am considering taking Tesla private at $420. Funding secured," Musk said in a tweet shortly before 1 p.m. Musk discussed the plans further in a blog post later Tuesday.
From there Musk tweeted several times. In responses to questions on Twitter, Musk said he will ensure the prosperity of shareholders "in any scenario." If Tesla went private, current investors could keep their stakes in Tesla through a special fund, or sell their shares at $420, he said.
Shares jumped after Musk's first tweet, trading as high as $371.15 before giving back gains. Later the stock was halted for more than an hour. When it reopened shares surged more than 10 percent.
Tesla shares were already trading higher on a report of a new stake from the Saudi Arabia sovereign wealth fund.
If the transaction got done at $420 per share, Tesla would be valued at just over $70 billion, making it the biggest deal in which a company is taken private.
Although Tesla has become the most valuable American car company, it has yet to turn an annual profit since its founding in 2003. And its chief executive, a 47-year-old native of South Africa, has come under increasing pressure as he has scrambled to increase production of the Model 3, a midsize sedan that he is counting on to drive up revenue and enable the company to become profitable.
Still, this is not the way multibillion-dollar leveraged buyouts are typically announced. Companies would normally line up banks, private equity firms or other deep-pocketed investors to agree in advance to provide money to finance the purchase of shares.
Officials representing a number of large banks and investment funds said on Tuesday that they had not talked with Tesla about financing a buyout, although it is possible the company had secured funding from other sources.
Mr. Musk’s comments on Tuesday — mentioning the specific price of a possible buyout and declaring that Tesla had already arranged funding — were virtually guaranteed to send the shares flying. Still, while it was unusual for a chief executive to make a market-moving announcement on Twitter, there is nothing improper about it on its face.
In 2013, the Securities and Exchange Commission said it was permissible for companies, and people acting on their behalf, to make announcements using social media platforms like Twitter and Facebook. It said companies had to alert investors in advance that those would be channels for important corporate news. And Tesla did so, in a filing in 2013.
But the S.E.C. has also advised that intentional releases of market-moving information on social media platforms or websites must be accompanied by a simultaneous release to the broader public. The delay between Mr. Musk’s tweet and Tesla’s corporate announcement could be of interest to the S.E.C., said Michael Liftik, a former deputy chief of staff at the commission who is now a partner at the law firm Quinn Emanuel Urquhart & Sullivan.
Elon Musk has launched a campaign to take Tesla private on a day that included several provocative tweets, a suspension (and resumption) of trading in the company’s shares, reports of a significant Saudi investment, a surge in stock price, and an evocative, Musk-tinged appeal to the Tesla faithful: “The future is very bright and we’ll keep fighting to achieve our mission.”
The ride started with Tesla’s stock rising more than 7% after Musk tweeted he was “considering taking Tesla private” and had funding in place to do so at a price of $420 (£325) per share. Shortly afterwards, Tesla published a blogpost written by Musk entitled ‘Taking Tesla private’ that had been sent to all employees.
Elon Musk (@elonmusk) Am considering taking Tesla private at $420. Funding secured.
The tweet appeared to be triggered by a report in the Financial Times that Saudi Arabia has built up a stake in Tesla worth up to $2.9bn.
At $420 a share, Tesla would have an enterprise value of about $82bn including debt, well above its stock market value, which reached $63.8bn on Tuesday. Shares closed up 11% at $378. To take Tesla private, Musk would have to pull off the largest leveraged buyout in history, surpassing Texas electric utility TXU’s in 2007. Analysts say Tesla doesn’t fit the typical profile of a company that can raise tens of billions of dollars of debt to fund such a deal.
In a follow up tweet, Musk wrote: “I don’t have a controlling vote now and wouldn’t expect any shareholder to have one if we go private. I won’t be selling in either scenario.”
In the letter sent out to Tesla employees, Musk did not say that Tesla had secured funding. He wrote instead that “a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best”.
Musk described the “wild swings” in Tesla’s stock price as a “major distraction” and said the quarterly earnings cycle puts “enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term”.
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But Musk rejected the interpretation that he was simply seeking greater wealth or control of the company than the 20% he already owns. He wrote: “Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible.”
Saudi Arabia’s public investment fund (PIF), which invests its vast oil wealth, has quietly built up a stake of between 3% and 5% in the company, according to the FT. The investment would not have emerged until now because stakes of less than 5% do not need to be disclosed to the stock market.
PIF, which manages more than $250bn in assets, reportedly made an overture to Musk earlier this year, offering to invest money in the company in return for new shares.
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Tesla ignored the approach, prompting PIF to begin acquiring shares in the company through stock markets, with the assistance of JP Morgan.
Analyst Gene Munster, a managing partner at venture capital firm Loup Ventures, told Bloomberg: “Elon Musk does not want to run public companies. His missions are big and make it difficult to accommodate investors’ quarterly expectations. Our guess is there is a one-in-three chance he can actually pull this off.”
No Wall Street bank contacted by CNBC said it was aware of any transaction or had any knowledge of commitment to funding a leveraged buyout of Tesla.
The Securities and Exchange Commission (SEC) also declined to comment on the matter.
The confusion increased speculation that Musk was engaged in a stunt – which could backfire if Musk is found to have violated fiduciary directives governing how senior executives at publicly-held companies are permitted to release information that could affect a firm’s stock price.
In 2013, the SEC ruled that companies are allowed to use social media outlets like Facebook and Twitter to announce news. But many thought Musk could be making a pun by twice tweeting “420” – an abbreviation of 4/20, code for the consumption of cannabis.
Musk’s fondness for making statements via Twitter has backfired in the past. He attracted furious criticism after baselessly calling a British diver who helped rescue the boys trapped in a flooded cave in Thailand a “pedo”. Tesla’s share price dropped and Musk was forced to apologise.
It started Tuesday afternoon with Elon Musk tweeting about taking Tesla private at $420 a share.
And then the shares were halted after surging 7.4% on the day. Then the CEO released a blog post expanding on his deliberations, which you can read here.
What to do now? Let us explore the legal inside information that can help you trade Tesla if you desire to do so.
Chart
Please click here for the annotated chart of Tesla TSLA, +10.99% Note the following from the chart:
• The chart shows the VUD indicator. This is the most sensitive indicator of net supply and demand in real time. The indicator is positive but less than would have been expected. The interpretation is two-fold. First, there are not many believers in the transaction actually happening. Second, short-sellers, who bet on a decline in the share price, have not covered their positions during this rise.
• Based on the latest information available, 29% of shares outstanding have been sold short. In our analysis, the actual number is likely higher.
• If a short squeeze starts, meaning short-sellers would have to cover their positions by buying the stock, the stock could rocket toward $420 long before any transaction is finalized.
• There obviously is high risk in buying the stock now. The chart shows support points. Stops can be put below these support points.
• It is advisable to put stops in tranches. We are providing to The Arora Report subscribers the exact size of tranches and stop zones.
• Since the stock can be halted or gap down on the next day, stop loss orders may not protect you. For this reason, stops should be only your second line of defense. The first line of defense is the position size. Another way to protect yourself is to buy put options. However, this may not be practical for many given the high cost of put options. One way to reduce the cost of put options is to buy put spreads.
• The overall risk-reward in this trade is attractive, but this is suitable only for aggressive investors as the risk of loss is high.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Money flows give you an edge. To see segmented money flows leading to this buyout development, please see “Money flows of 11 popular tech stocks show Alphabet and Apple getting stronger.” After the tweet from Musk, smart money flows have been neutral and momo money flows have been positive.
As Tesla’s stock price moves around, the principles described here will remain applicable. This is the legal insider information that can help you trade Tesla.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
