In a surprising turn of events, Tesla (TSLA - Free Report) CEO Elon Musk posted an official statement to the company’s blog late Friday night stating that he – with the input of the board of directors and a team of outside advisors that included Goldman Sachs (GS - Free Report) , Morgan Stanley (MS - Free Report) and the private equity firm Silver Lake Partners – had decided to abandon his plans to take the company private.
Musk had previously used Twitter to make public his consideration of taking the company private at a price of $420/share and said that he had “funding secured,” setting off a firestorm of speculation about the who’s, what’s, when’s, and why’s of a potential deal.
In the aftermath of the original tweet, Musk explained that the funding he was referring to was a potential investment from the Saudi Arabia sovereign wealth fund and that he thought as many as two thirds of existing Tesla shareholders would opt to maintain their ownership stake in the new private entity, reducing the total cash needed to complete the transaction from the original estimate of roughly $72 billion to something closer to $25 billion.
Reportedly, The S.E.C. has expanded an investigation into Musk’s prior public statements to include the possibility that his explosive “go private” tweet may have included material misstatements or omissions, which could constitute a violation of Federal securities laws.
Tesla shares rallied sharply after the original tweet, hitting an intra-day high of $379.57/share before settling back into a trading range around $320/share over the ensuing three weeks as details for – and doubts about - Musk’s plans played out in the media.
It remains to be seen whether Musk’s public statements represent any violation of the law, but clearly a lot of money changed hands in the aftermath and it’s not inconceivable that Musk as an individual or Tesla as a corporation could find themselves defending civil liability from parties who suffered losses trading Tesla shares in the wake of his market-moving public statements.
Ultimately, it seems that the deal was shelved because several large institutional owners of Tesla shares are subject to significant restrictions on maintaining an ownership stake in a non-private company. As of the most recent set of 13-F filings, 56 million shares of Tesla – nearly a third of the total 171m shares outstanding – were held by just six institutional investors, Baillie Gifford, T Rowe Price, Fidelity, Vanguard, Blackrock and Capital World Advisors.
The certainty provided by the regular reporting requirements for public companies is important for large mutual funds and small investors alike. Though the concept of avoiding the often negative press associated with publicly detailing Tesla’s results as they attempt to become the world’s largest automaker, the practical application of the plan proved too complicated.
Additionally, there were murmurs that a significant investment in the electric carmaker by an investment fund backed by big oil money could be a significant public relations issue and an apparent contradiction of Tesla’s stated goals to free the world from dependence on fossil fuels for transportation.
What’s Next for Tesla?
Aside from the pending investigation into the legality of the language and methods Musk used to communicate with the markets, not all that much has changed fundamentally about the company during its wild month of August. While it remains a traditional public company, investor focus will once again be on the amount of Model 3 autos the company has been able to produce and deliver to customers when they report next on November 7th. Gross margins will be in focus as well as industry analysts debate the amount of profit Tesla is able to squeeze out of each new sale – which will have a significant impact on the company’s financial situation.
If Tesla has been able to sustain production of 6,000 or more vehicles per week - on their way to the self-applied goal of 10,000 per week – and sell them at gross profits of 20% or more, the company will be well on its way to being sustainably cash flow-positive and will be able to bootstrap their way to production of the upcoming Model Y, the Roadster and the Tesla Semi truck.
If Tesla reveals any difficulty in producing and profitably selling their first mass-market vehicle, investors are likely to punish the shares as their tolerance for promises seems to be growing thin.
Though it’s been a head-spinning month of developments for one of the world’s most interesting and hotly-debated companies, in the end, investors fall back on the most fundamental factor of all – asking when can they expect profits rather than just talk.
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