The biggest question is funding with only a few pockets deemed deep enough, including Saudi Arabia’s sovereign-wealth fund
Wall Street had more questions than answers Wednesday as analysts sifted through the Tesla Inc. going-private news bombshell.
Tesla TSLA, -1.44% Chief Executive Elon Musk roiled markets Tuesday by tweeting he was “considering” taking the Silicon Valley car maker private, and the company later posted on its website an email to employees from Musk expanding on the idea.
Other than the “funding secured” claim in the original tweet, however, few details have emerged about how it would finance such a massive deal. Several board members on Wednesday confirmed that Tesla had raised the idea a week ago, but did not indicate whether they were in favor.
“Frankly, we’re as confused as anyone else,” analysts at Bernstein said in a note, going on to line up eight questions around Musk’s wish to take Tesla private at $420 a share while offering few details on how to go about it.
Read more: Tesla short sellers walloped after Musk talks going private
For the shares, there’s upside risk in the near term to perhaps $400, but downside risk to $340, Tuesday’s low, or below “if no firmer details emerge, as investors would likely increasingly debate Musk’s credibility and over-focus on the shares’ price and volatility,” the Bernstein analysts said.
Tesla shares fell 1.4% Wednesday, trading as low as $367.12, after ending at $379.57 Tuesday, an 11% advance and their highest since a Sept. 18 record high of $385.
The Bernstein analysts said they got confirmation from Tesla’s investor relations that Musk’s talk about financing was correct.
Tesla’s enterprise value hovers around $80 billion, and estimates on how much Tesla would need in financing to cinch the deal varied and depended on assumptions on whether a significant number of investors would not tender their shares, as Musk seemed to indicate when he mentioned having investor support.
Musk has a 20% stake, around $13 billion, which he said would remain the same.
Whoever steps in to buy Tesla at $420, when the stock traded around $300 last week, would be “clearly someone who wants a majority (or a very large stake),” which leaves only a few pockets deep enough, including Saudi Arabia’s sovereign-wealth fund, which reportedly took a stake in Tesla this week but according to a report on The Wall Street Journal had no plans to expand it.
Musk and Softbank Group Corp. 9984, -0.38% Chief Executive Masayoshi Son held talks last year, including about potentially taking the car maker private, but the discussions fell through “due to disagreements over ownership,” according to a Bloomberg News report that cited two people with knowledge of the discussions.
Analysts at Evercore ISI also zeroed in the lack of details around “funding secured.”
A “possible scenario” would be 50% to 60% of existing shareholders, including Musk’s 20% holdings, continue, “with their holdings rolled into a new private structure,” the Evercore ISI analysts said.
That would leave Tesla needing to raise equity capital of $31 billion to $39 billion to buy out those existing public shareholders who tender; 40% to 50% of Tesla’s implied $78 billion market value, and assuming debt is rolled, they said.
The more likely route to that $31 billion-$39 billion would be a combination of a strategic investor, two to three private investment firms or sovereign-wealth funds, and “certain larger members of the existing shareholder base or some form of fund for smaller accredited investors making up the delta,” they said.
Aside from not having to answer to markets in the short term, as Musk pointed out in his email, the Evercore ISI saw one advantage of going private —it could provide Tesla with deeper pockets to grow internationally at a faster rate, and security through the next U.S./capital markets recession where public funding would dry up, they said.
Analysts at J.P. Morgan raised their price target on Tesla on Wednesday to $308 from a previous $195, then one of the lowest among major investment banks. They are “not as certain” as Musk that Tesla will go private, so assigned a 50% probability to the scenario in their updated valuation.
“We continue to believe Tesla’s valuation based on fundamentals alone … is worth no more than $195,” the analysts said. “But introducing a new 50% weighting of $420 suggests a large upward revision to our price target is warranted, and we newly value Tesla at $308 per share (i.e., 50/50 blend of $195 and $420).”
Analysts at Goldman Sachs recalled Dell’s $25 billion buyout in 2013, only to reject that as a perfect case study for Tesla.
“While the transaction was somewhat similar in nature to what is being proposed at TSLA, the EBITDA generation and cash flow characteristics of the business were very different given a more mature product and growth profile,” the analysts said. Dell’s reported 2013 adjusted EBITDA was $5.1 billion, and free cash flow generation was about $3 billion.
Tesla’s free cash flow was a negative $739 million in its latest quarter.
Goldman kept its sell rating and six-month price target on Tesla at $210, also one of the lowest on the Street.
Piper Jaffray analysts assigned a low likelihood the deal would come to pass.
Tesla would not be going private “anytime soon,” they said, as many details remain “unknowable” and as result “the deal is unlikely to succeed in the very near-term, if it succeeds at all,” the analysts said.
For the “true believers with a multi-year time horizon,” the suggested go-private valuation would be “unpalatable,” and gaining shareholder approval would be easier than gaining funding, the analysts said.
Tesla shares rose 20% this year, compared with gains of 7% and 3.6% for the S&P 500 index SPX, -0.03% and Dow Jones Industrial Average. DJIA, -0.18%
