August 7, 2018 / 10:44 PM / 10 days ago

Breakingviews - Tesla buyout would need to go short on leverage

NEW YORK (Reuters Breakingviews) - Elon Musk has set up a new diversion for the electric-car maker he runs. On Tuesday he announced on Twitter he is “considering taking Tesla private at $420. Funding secured.” That’s not as big a long shot as it might sound. But a buyout would have to be short on leverage.

SpaceX founder Elon Musk pauses 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

Musk’s putative offer values Tesla at some $72 billion. Although U.S. regulators have softened their stance on leveraged lending recently, banks would probably lend only around a third of that to keep debt within six times EBITDA. Be generous and apply that to Morgan Stanley’s estimate of almost $6 billion of EBITDA in 2022. After stripping out Tesla’s current debt, that leaves around $25 billion to purchase shares.

That may look like Musk would be $50 billion adrift of his goal. But he’s not selling his own 20 percent stake. And he still commands a lot of faith among his shareholders. Before his latest tweets, the stock was trading around 40 times estimated earnings for 2020, according to Thomson Reuters I/B/E/S. That suggests plenty of smaller investors would probably go along for the ride and take up Musk’s offer to keep their stakes if Tesla goes private.

For the same reason, he should be able to persuade many of the top 20 owners to stay in the passenger seat. They own more than 50 percent of the stock. Even if a good number chose to exit the vehicle, there are plenty of other investors to chase after. The Saudi Public Investment Fund, for example, has built a $2 billion stake this year, the Financial Times reported on Tuesday. SoftBank has already injected money into Uber and General Motors – and its Vision Fund has amassed an almost $100 billion war chest.

The visionary founder has appeared irritated by his lost status as the irreproachable wonder boy of Silicon Valley. Recent criticism about missed production targets and capital needs has gotten under his skin; in May he derided analysts for asking “boring, bonehead questions.” Tesla is also the most shorted stock on U.S. bourses.

Driving the company off the public market would remove many of these irritants. Granted, it wouldn’t solve the “production hell” Tesla has been in for over a year. But that’s all the more reason to avoid the treacherous conditions a blizzard of debt can create.

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