On August 7th, Elon Musk put Tesla (TSLA) into play. The eccentric CEO did so by unconventional means, tweeting out to his millions of followers that he was considering taking the electric vehicle-maker private at $420 per share, which would imply an equity valuation of more than $70 billion. That statement alone might not be considered problematic, but his statement that he had “funding secured” for the transaction might well be, since it is now abundantly clear that he had no firm offer to back up the claim, nor had he conducted any of the preliminary due diligence and planning expected of even a small M&A transaction, let alone the largest take-private operation in history.
When Elon first issued his tweet, much of the market took him at his word and the share price spiked accordingly. When it became clear that his tweet was actually an impulsive act done without consultation of his board, banks, advisors, or would-be buyers, the stock subsequently crashed.
Elon’s actions have spurred an SEC investigation and spawned a litany of class action lawsuits that could put Tesla on the hook for more than $1 billion in damages. Yet, some true believers have not lost hope that Elon might be able to pull a rabbit out of his hat and actually get a deal done. This hope has been fueled in large part by the frantic efforts of Elon and Tesla’s board to backfill his statements. Elon has contracted legal and M&A advisors, as has the board. Of course, this appears to be more kabuki theater than serious buyout planning, as Elon has neither presented a serious take-private plan to the board, nor identified a confirmed source of funding.
The closest Elon has come to answering the question of the source of the necessary cash to take Tesla private came in the form of a blog post published on August 13th. In it, he claimed that he had been having conversations with the leadership of Saudi Arabia’s sovereign wealth fund and that they had indicated eagerness to proceed. It now seems like Elon may have been exaggerating, to say the least.
In this research note, we discuss the hurdles facing any potential Saudi role in taking Tesla private. We find that, despite Elon’s asserted confidence, there is vanishingly small prospect that the Saudis will bail him out – let alone at the $420 per share figure he seems to have made up on the fly.
Elon’s Arabian Gambit
In his blog about a potential financial backer for his take-private scheme, Elon had this to say about the Saudi sovereign wealth fund:
Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction.
Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed.
I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement.
Following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.
Whether any of that is true remains to be seen. However, given what we know about the Saudi sovereign wealth fund’s resources, priorities, and strategy, it seems vanishingly unlikely that it has the capacity or the will to back Elon’s take-private scheme.
Not Enough Cash to Go Around
The Saudi sovereign wealth fund appears a highly unlikely source of the massive amount of capital needed to take Tesla private for several reasons. First of all, it does not have the financial firepower to make a tender offer without massively overcommitting to a single high-risk venture. Indeed, the fund is already struggling to scare up the cash to meet its current commitments:
Saudi officials have become concerned about the kingdom’s ability to fund those commitments, let alone make a big new one, people familiar with the matter said.
The people are skeptical the fund has any serious plans to take a sizable stake in Tesla beyond the nearly 5% it recently bought.
The Saudi sovereign wealth fund was supposed to be enhanced by the proceeds of taking the state oil company, Saudi Aramco, public. But since that process has been delayed indefinitely, the sovereign wealth fund will have to subsist on its current allocation. That is worth over $100 billion, which is hardly chump change, but also not enough to commit to a deal that would likely cost, at a minimum, $25 billion to buy out retail investors, index funds, and institutions not interested in following Tesla into private ownership.
Legal and Regulatory Hurdles
Any foreign government seeking to take a substantial or controlling interest in a major American business must first pass through a congressional oversight process. That alone could delay, or even scupper a take-private deal, especially given the nativist bent of the current administration. The Saudis already own 5% of Tesla, and it seems unlikely that it would have the inclination to risk the rest on a legally precarious and highly costly operation.
Saudi Arabia is also prone to avoiding legal clashes, so the invigorated SEC investigation and looming massive potential civil liabilities are likely to have soured them to the idea, even if they were considering it before Elon’s ill-judged tweet.
A Lucid Moment
A final reason the Saudis are unlikely to bail Elon out of his tricky situation became public on Sunday, August 19th. It turns out that the Saudis have just come to terms with another EV startup, Lucid Motors, which is run by several veterans of Tesla, including much of the team that developed the Model S, arguably Tesla’s most successful product.
According to the term sheet, the Saudis will be able to invest up to $1 billion as various milestones are met, which would result in their obtaining a controlling interest. That is a lot less money for a lot more control.
Of course, some might argue that the Saudis could do both. After all, they already disclosed owning a substantial chunk of Tesla stock purchased on the open market. But there is a big different between a multi-billion-dollar allocation and a full-on buyout (or partial buyout).
More importantly, it is critical to recognize that Lucid’s leadership and engineering teams, having gotten out from under Elon’s thumb, would be loath to enter an arrangement in which they are essentially wedded to their former employer. Saudi control over both Tesla and Lucid is clearly not in the interest of Lucid’s people. Therefore, it is highly likely that whatever final deal emerges from the term sheet will protect the young startup from interference from Tesla. That would almost certainly preclude the Saudis from taking the lead in taking Tesla private.
Investor’s Eye View
Whether Elon has really been talking to the Saudis about taking Tesla private or not remains to be seen. It will clearly be a major point of interest to the SEC investigators. Perhaps discussions have taken place, but clearly they have not gone beyond the conversation stage. We can be confident of this fact for a number of reasons:
- Elon has continued to present nebulous ideas about the ownership structure of the private Tesla, implying that he would prefer a diffuse ownership base even as he talks up the Saudis’ supposed capacity and will to take Tesla private.
- There is no term sheet; and now we know that the Saudi sovereign wealth fund, like any properly managed financial institution, uses term sheets as a matter of course.
- No due diligence has occurred; the board was blindsided by Elon’s tweet and advisory firms were only contracted days after the fact.
This leaves Elon and Tesla in a dangerously precarious position, with potential criminal and civil liabilities that could wreck the company’s future. Tesla is already operationally and financially stressed; the added costs of buyout advisors, lawyers, and crisis PR consultants will only exacerbate them.
The Saudis may be making big bets on alternative energy and EV technology. But they are also interested in producing returns. The whole point of the sovereign wealth fund is to put the country’s oil profits to work by generating cash through diverse ventures. Sinking a significant percentage of its sovereign wealth fund into an EV company that has never produced a full-year profit, faces mounting competition, and likely to get hit with significant legal liabilities is not a winning investment strategy. The Saudis clearly understand that. The market is starting to understand that. The question now is whether Elon understands it yet.
Investors should disabuse themselves of the notion that a Saudi rescue is imminent. It is not.
Disclosure: I am/we are short TSLA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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