Shares of Tesla jumped nearly 11 percent Tuesday after Chief Executive Elon Musk said on Twitter that he is debating taking the electric car manufacturer private.
"Am considering taking Tesla private at $420. Funding secured," the CEO wrote in his original post, adding in subsequent tweets that shareholders could either opt to sell at $420 per share or hold their stake and go private.
In an email to employees later Tuesday, Musk explained that, as a public company, Tesla shares are subject to "wild swings" in price that prove to be a "major distraction" and that Wall Street's quarter-to-quarter expectations may not necessarily be a good fit for the company.
"This is out there, even for Tesla," a Barclays note said. "Buyout would require about $70 billion: roughly $60 billion for equity and about $10 billion to take out debt. With 145 million shares, a buyout at $420/share would require $60 billion to take out all public shareholders. Even with the Saudi fund taking a 3 percent to 5 percent stake, that leaves a large funding gap. And credit markets may not be that receptive."
Here's a wrap of all the major analyst opinions going out to Wall Street analysts regarding Musk's musings on privatization.
J.P. Morgan Chase (underweight):
"As surprising to us as these developments are, and as lacking as the statements are in any details regarding who is expected to provide the required amount of financing and on what terms, they are nevertheless declarative statements from the CEO of a public company which we feel should be considered seriously. Either funding is secured or it is not secured, and Tesla's CEO says funding is secured. Therefore, we are incorporating into our valuation the real possibility the equity will be taken out at $420 per share. Separate from the Twitter statements, the company also made public a letter Mr. Musk had written to Tesla employees in which he states, 'If the process ends the way I expect it will, a private Tesla would ultimately be an enormous opportunity for all of us.' To us, this suggests more than mere consideration — Mr. Musk expects Tesla will go private."
"We continue to believe Tesla's valuation based on fundamentals alone is worth no more than $195 (our previous price target). But introducing a new 50 percent weighting of $420 suggests a large upward revision to our price target is warranted, and we newly value Tesla at $308 per share."
Bank of America Merrill Lynch (underperform):
"Although Tesla did confirm a potential privatization through Musk's statement, no theoretical transaction method, funding plan, or structure was outlined, and there is still some skepticism over whether such a transaction would ultimately be executed. Ultimately, we view today's announcement as having substance given what appears to be at least three potential sources of capital. Further credence was added with potential details in Musk's subsequent tweets regarding the setup of 'special purpose fund' for existing investors to remain involved, commentary that no single shareholder would have control, and that he would remain on as CEO. Despite a new factor being thrown into the mix on Tesla's stock, namely a potential unsubstantiated Elon-led buyout, privatization of the company is still very much unclear at this point; and therefore, we maintain our underperform rating."
Morgan Stanley (equal weight):
"We sympathize with Elon Musk's argument that Tesla could be better off as a private company. The scale and scope of launching an auto company while providing a focused internal narrative to employees and stakeholders on the goals of the enterprise may be better aligned outside of the eye of the public market with a longer-term horizon. Tesla has long relied on public markets to fund its ambitious plan and has used its highly priced equity and equity-linked currency to its advantage since 2010. Taking the company private would assume one of 2 factors changing: (1) that the company is on the verge of generating self-sustaining cash flows or (2) that the company can tap into a range of strategic sources of capital not previously at its disposal."
"If Tesla's CEO really wanted to go private… why announce it to the world in this way… which could significantly contribute to the required premium and financial leverage? For much of the past few months, Tesla's CEO has made statements directly engaging investors and at many times making supportive statements to the share price. Investors might reasonably ask why Tesla management would want the stock price to reflect all the premium of an LBO up-front. It is hard to understand the potential reason for such a negotiating strategy."
Goldman Sachs (sell):
"We do see some potential issues transitioning the current shareholder base to this type of private structure as there may not be enough liquidity for large institutions within the current fund ownerships (i.e., funds managing investments in publicly traded stocks vs. potential private transaction arms of the business). We believe this would require some degree of internal shifting of the investment responsibility, where different return metrics, AUM sizes, and investment strategies could be under consideration. While we take no view on the potential conversion rate of public to private shareholders, we note that incremental equity or leverage could potentially be needed to help finance an MBO."
UBS (sell):
"Earlier today, CEO Musk tweeted that he is 'considering' taking Tesla private at $420/share and noted funding was secured. Following his tweet, an email sent to employees was shared publicly outlining the motivation including noting that volatile stock prices are distracting to Tesla employees. We find the timing of the tweet (& the method itself) interesting given less than a week ago the company said it would be profitable with positive cash flow in Q3/Q4. In our view, this may be another way for Musk to change the conversation around the company; however, we note that the fundamentals have in no way changed."
RBC (sector perform):
"We mostly agree with Elon's sentiment that being public puts more focus on short term quarterly metrics and can distract from the long-term mission. He held up SpaceX, which does seem to operate more smoothly, as a prime example. However, being private could hamper raising new equity if ever needed. Now if we are correct in the above on outside funding, Elon may believe that gives him the cushion he needs to get him through Model 3 ramp and China Gigafactory build out as well as coming debt obligations. Should this deal occur, we believe that remaining in is a vote of confidence in Elon and represents an avenue for those that want to invest with Elon. However, liquidity is hampered (2 trading periods a year) and what type of disclosure would be provided is unclear."
Barclays (underweight/neutral):
"This is out there, even for Tesla ... Buyout would require about $70 billion: roughly $60 billion for equity and about $10 billion to take out debt. With 145 million shares, a buyout at $420/share would require $60 billion to take out all public shareholders. Even with the Saudi fund taking a 3 percent to 5 percent stake, that leaves a large funding gap. And credit markets may not be that receptive. The Tesla unsecured bonds trade at a yield of about 6.7 percent, so even if say $40 billion could be financed in the high yield market, the annual interest bill would consume $2.7 billion in cash. And not clear how public shareholders stay in a private company. Musk promised that existing shareholders 'can stay investors in a private Tesla' – but we're not clear how that would work under current registration rules/caps on non-accredited and total investors – although Musk hinted at a special purpose vehicle structure that might be able to avoid the caps."
Evercore (in-line):
"It is important to note that, as of today, no details have been provided with regards to what 'Funding secured' means, who is providing that funding and what any potential funding structure might look like. Our view is that 'Funding secured' should be interpreted as a strong verbal commitment, with funds available and parties willing to execute quickly. However, it could be less than this. It may also be that initial legal documents, term sheets, letters of intent have been signed. While several press reports suggest an 'LBO,' given Tesla's EBITDA and cash generation today, we don't see material leverage as likely. Instead, we see a possible scenario where 50 percent to 60 percent of existing shareholders (including Musk's 20 percent holding) continue, with their holdings rolled into a new private structure."
Jefferies (hold):
"True to his unconventional and questionable communication style, Elon Musk tweeted 'Considering taking Tesla private at $420. Funding secured'. No further details or confirmation. The rationale for being private is well known (see email to employees on website). There is no intention to merge with SpaceX. $420/share would value Tesla at $71 billion, 2.3x 2019E revenue. Subject to a shareholder vote and to conditions offered in terms of liquidity, exit and potential remuneration the overall cash cost could be more modest considering c.20 percent insiders and c.30 percent long term holders. As Tesla can hardly take on more debt, providers of funds could become new large shareholders. Also, despite repeated complaints, Tesla has hugely benefited from supportive public markets and from abnormally low cost of capital which may not be sustained privately."