Archives for August 7, 2018

Musk plan to privatize Tesla pushes $2.3 billion of debt above conversion price

NEW YORK (Reuters) – Elon Musk’s suggestion on Tuesday that he would like to take Tesla Inc private may provide something the electric car maker needs: a little debt relief.

FILE PHOTO: Tesla Motors Inc Chief Executive Elon Musk pauses during a news conference in Tokyo September 8, 2014. REUTERS/Toru Hanai/File Photo

The 11 percent jump in Tesla’s stock price following Musk’s public musings on possibly buying the company from existing shareholders drove $2.3 billion of convertible debt past the level at which investors can swap them for stock at a profit.

Tesla shares ended the day at $379.57, within reach of their all-time high and more than 5 percent above the bonds’ conversion price of $359.8676.

“This is great news for any bondholder any way you spin it,” said Ross Gerber, chief executive of Gerber Kawasaki Wealth and Investment Management who owns both the convertibles and the stock.

“Most of these bonds are convertible notes, so we can choose to convert into stock at a huge profit,” he said. “This is a boon for any bondholder at Tesla, because most of the bonds are convertible notes.”

Convertibles give bondholders the right to trade their debt for equity after shares rise over a certain set price.

The $2.3 billion in debt that investors can now take in equity rather than cash removes pressure from the cash-strapped company which has about $9.5 billion in long-term debt, according to its latest financial statements.

After first issuing a tweet that he was mulling the idea of taking Tesla private, Musk on Tuesday said in a letter to employees that he would prefer to run Tesla as a private company to allow it to operate away from the attention it receives due to its notoriously volatile stock price.

While no final decision has been made, he suggested a buyout price of $420 per share.

Investors like billionaire George Soros now have the option to take advantage of Tesla’s recovering share price, as the company’s $920 million convertible bond due in March 2019 passed its $359.8676 conversion rate.

Soros Fund Management LLC took a $35 million stake in the 2019 Tesla convertible bonds in May of 2018.

The company’s $1.38 billion convertible bond due in March 2021 also passed the same conversion rate.

The convertibles have oscillated between being in and out of the money several times over the last year.

They first rose above the conversion price in June 2017 and Tesla’s stock price hit a record high of $389.61 in September last year. The stock then plunged to as low as $244.59 in April as the company struggled to meet production targets for its Model 3 sedan and Moody’s Investors Service cut Tesla’s credit rating deep into junk-bond territory.

Tesla on Aug. 1 reported that it had ended the second quarter with $2.78 billion in cash after spending $610 million in capital expenses, while its negative free cash flow narrowed.

Tesla has been burning through cash as manufacturing problems have thwarted its ability to meet production targets for its Model 3 sedan.

The company also has a $1.8 billion high-yield bonds, which rose to 92 cents on the dollar on Tuesday, up half a cent and the highest since mid-June. Following the Moody’s downgrade, the bond had fallen to as low as 86.25 cents on the dollar. It now yields 6.75 percent versus more than 7.7 percent in early April.

Reporting by Kate Duguid; Editing by Dan Burns and Clive McKeef

Elon Musk says taking Tesla private is 'best path,' shares jump

SAN FRANCISCO (Reuters) – Chief Executive Elon Musk said on Tuesday he is considering taking Tesla Inc private in what would be the largest deal of its type, moving the electric car maker out of the glare of Wall Street as it goes through a period of rapid growth under tight financial constraints.

“Am considering taking Tesla private at $420. Funding secured,” Musk said on Twitter bit.ly/2Om3gn3. At $420 per share, a deal would be worth $72 billion overall.

In a letter to Tesla employees published more than an hour later on the company’s blog here, Musk explained that going private would be “the best path forward.” Such a move – over which no final decision had been made – would let Tesla “operate at its best, free from as much distraction and short-term thinking as possible,” he wrote.

Tesla shares closed up 11 percent at $379.57, slightly below their all-time high.

Asked on Twitter whether Musk would continue to be CEO under such a scenario, he replied there would be “no change.”

Musk has been under intense pressure this year to turn his money-losing, debt-laden company into a profitable higher-volume manufacturer, a prospect that has sent Tesla’s valuation higher than that of General Motors Co.

The company is still working its way out of what Musk called “production hell” at its home factory in Fremont, California, where a series of manufacturing challenges delayed the ramp-up of production of its new Model 3 sedan, on which the company’s profitability rests.

The Silicon Valley company faces a make-or-break moment in its eight-year history as a public company as competition from European automakers is poised to intensify with new electric vehicles from Audi and Jaguar, with more rivals to follow suit next year.

Meanwhile, Tesla has announced plans to build a factory in Shanghai, China, and another in Europe, but details are scarce and funding unknown.

Going private is one way to avoid close scrutiny by the public market as Musk and the company face those challenges. Musk has feuded publicly with regulators, critics, short sellers and reporters, and some analysts suggested that less transparency would be welcomed by Musk.

“Musk does not want to run a public company,” said Gene Munster of Loup Ventures, as Tesla’s ambitious mission makes it “difficult to accommodate investors’ quarterly expectations.”

Musk owns nearly 20 percent of the company. He said in his letter to employees he did not seek to expand his ownership.

A price of $420 per share would represent a nearly 23 percent premium to Tesla’s closing price on Monday, which gave the company a market value of about $58 billion.

In his letter, Musk suggested a choice for shareholders of selling their shares for $420 each or remaining investors in a private Tesla. He said he hoped all current investors would remain were the company to go private.

He made no mention in his tweets nor his letter where the funding for a deal would come from, and the letter did not discuss funding for the plan.

Like any other investor, Musk is beholden to securities laws and several securities attorneys told Reuters he potentially could face lawsuits if it was proven he did not have secure financing at the time of his tweet.

(GRAPHIC-Market value of Tesla, Ford, GM: tmsnrt.rs/2n4mFjh)

BIGGEST GO-PRIVATE DEAL

If Musk were to succeed in taking Tesla private, it would be the largest leveraged buyout of all time, beating the record set by the $45 billion deal for Texas power utility Energy Future Holdings, which ended in bankruptcy in 2014.

Raising both the debt and equity required for such a deal would be a challenge. Many major Wall Street bankers contacted by Reuters said on condition of anonymity they were not aware of Musk’s plans ahead of his tweets, and several expressed skepticism that a leveraged buyout of Tesla could be financed given the company’s negative cash flow.

“It’s unfathomable to me that anyone would finance the acquisition of such a liability-laden company that is losing so much money and have massive capex requirements going forward,” said Mark Spiegel, portfolio manager of hedge fund Stanphyl Capital Partners, who holds a short position in Tesla and has been a vocal critic of Musk on Twitter.

FILE PHOTO: Elon Musk listens at a press conference following the first launch of a SpaceX Falcon Heavy rocket at the Kennedy Space Center in Cape Canaveral, Florida, U.S., February 6, 2018. REUTERS/Joe Skipper/File Photo

The most obvious equity partners for Musk would be a sovereign wealth fund such as Saudi Arabia’s Public Investment Fund (PIF) or major technology investment funds such as SoftBank Group Corp’s Vision Fund, bankers said.

China’s Tencent Holdings, which took a 5 percent stake in Tesla last year, is another possible partner.

Such foreign sources of capital would be subject to scrutiny by the Committee on Foreign Investment in the United States (CFIUS), which looks closely at deals for potential national security risks.

Earlier on Tuesday, a source familiar with the matter said Saudi Arabia’s PIF had bought a minority stake of just below 5 percent in Tesla.

UNORTHODOX ANNOUNCEMENT

The U.S. Securities and Exchange Commission declined to comment on Musk’s tweet, but the agency allows companies to use social media outlets like Twitter to announce key information in compliance with its fair disclosure rules if investors are alerted about which social media outlets will be used.

Tesla alerted investors in a 2013 SEC filing that they should follow Musk’s Twitter feed for “additional information” about the company. There is no reference to Musk’s Twitter account on the company’s investor relation page under “investor communication,” although Tesla’s Twitter feed is included.

In his letter to employees, Musk wrote that, “as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”

A short squeeze is a trading scenario that occurs from time to time in heavily shorted stocks, when bearish traders are forced to buy shares to avoid big losses – something that ends up pushing the stock only higher.

Short interest in Tesla on Tuesday stood at nearly $13 billion, according to S3 Partners, a financial analytics firm.

(GRAPHIC-Tesla shares jump 10 percent, near record high: tmsnrt.rs/2MbzJin)

FILE PHOTO: A Tesla sales and service center is shown in Costa Mesa, California, U.S. June 28, 2018. REUTERS/Mike Blake

Reporting by Sonam Rai in Bengaluru, Alexandria Sage in San Francisco, Carl O’Donnell, Liana Baker, David Randall in New York and Pete Schroeder in Washington; editing by Saumyadeb Chakrabarty, Bill Rigby and Chris Reese