Tesla Is Delisting? Here’s Everything You Need To Know About The Company And Its Controversial CEO Elon Musk
On Tuesday, August 7, Tesla’s CEO, Elon Musk, tweeted:
“Am considering taking Tesla private at $420. Funding secured.”
This brief message was enough to boost the company’s share price by about US$40. Tesla’s shares rose to an intraday high of US$387.49 before closing at US$380.
The tweet was the latest in a string of controversies generated by Musk. A recent example was his proposal to build a mini-submarine that would rescue the Thai soccer team trapped in a flooded cave. When British caver, Vern Unsworth, ridiculed the idea, Musk called him a “pedo guy.” A few days later, he apologised to Unsworth.
However, this time around, Musk may have gone too far. By tweeting about the company’s intention to delist, Tesla’s CEO could have broken the law and exposed himself and his company to an investigation by the Securities and Exchange Commission (SEC), the U.S. regulatory agency that monitors the financial markets.
What’s wrong with tweeting about taking your company private?
Plenty, it seems. The SEC’s rule 14e-8 says that announcing an offer regarding the sale of securities without the intention of completing the transaction within a reasonable period, could be termed a “fraudulent, deceptive or manipulative act.”
Of course, the rule is subject to legal interpretation. But, it’s important to remember that Musk’s tweet resulted in a sharp appreciation in the company’s share price.
Tesla’s share price spiked on August 7
Now, if it turns out that in fact, funding for taking the company private has not been secured, Musk could have contravened the provisions of the SEC rule.
What’s the probability that the SEC will start an investigation? A media report quoted Tom Gorman, who has worked as a senior enforcement attorney with the SEC, as saying, “I can’t imagine that the enforcement division hasn’t opened a file, that they are not calling his counsel or him and saying ‘we would like whatever papers you have about this, …’ And right after we have finished seeing all this stuff, we would like to talk to you.”
Musk’s secret backers
Has Musk arranged the funds that are required to take Tesla private? He needs all of an estimated US$80 billion to carry out his plan. If the funding has been arranged at US$420 per share that’s excellent news for Tesla shareholders. On the other hand, Musk’s tweet could have been just another instance of his habit of shooting from the hip.
The coming weeks and months will reveal the truth about the privatisation of Tesla. In the meantime, there are many investors who don’t believe Musk. They hope to profit by shorting the company’s shares.
The day before Musk’s announcement, Tesla’s shares were trading at US$340. Now the price is at US$370. But the investors who believe that the privatisation will never take place are betting that prices will fall steeply in the coming days and weeks.
Mark Spiegel, a hedge fund manager at Stanphyl Capital, said, “Clearly we all believe there’s an extremely low probability he can get that deal done. He can’t do it with debt, the financials are too horrible. So it’d have to be equity, and there’s not enough stupid money to buy this company at an US$80 billion valuation.”
So, who has promised Musk the money to take Tesla private? That information is not available in the public domain, but the investors must be people who have a lot of faith in Tesla and its ability to live up to its promises.
Investors question Tesla’s valuation
The company’s performance may not justify its high share price. Consider the following:
⇨ Tesla’s market capitalisation at its current share price is about US$62 billion. It has produced about 200,000 cars since the launch of the Tesla Roadster ten years ago. Ford, which makes over 6 million vehicles a year has a market cap of US$40 billion. General Motors, produces almost ten million vehicles annually. Its market cap is only US$54 billion.
⇨ Tesla’s high share price is also not linked to its profitability. In the second quarter of this year, the company reported a whopping US$717.5 million loss. This was after a loss of US$709 million in the first quarter. Is the position improving? In fact, the losses are getting bigger. In the second quarter of last year, Tesla had reported a loss of US$336 million.
Meanwhile, Ford reported a profit of over US$1 billion in the second quarter of this year while General Motors’ net income in the same period stood at US$2.39 billion.
Why is Tesla’s share price so high? According to the short-sellers, the company’s stock is overvalued by a wide margin. Christopher Irons, a financial blogger, has been quoted in the Financial Times as saying, “There’s one million reasons” to short Tesla stock. “You can start with the fact that the company just posted its largest net loss in history and that, if the CEO is serious about going private at US$420 per share, the upside is now tapped and the risk is all on the downside.”
How an increase in the share price could help Tesla
A convertible bond issued by the company is due to mature on December 1. If on that date, Tesla’s share price exceeds US$359.87, bondholders can decide to convert the debt into equity. However, if the price is lower, it could lead to a cash outflow of US$920 million for Tesla.
Clearly, a rise in the share price could be of great help to the company. But, Musk’s tweeting about a proposed deal to privatise the company may not have been the best way to get the stock price to rise. Former SEC Chairman Harvey Pitt says, “If his comments were issued for the purpose of moving the price of the stock, that could be manipulation. It could also be securities fraud.”