Shares of Tesla (TSLA - Free Report) sunk about 2.5% on Wednesday, just one day after CEO Elon Musk surprised investors by revealing that he is considering taking the electric car company private. Tesla shares are still up significantly from the surge seen after Musk controversially shared details of the proposed deal on Twitter, but today’s trading suggests many remain skeptical about the practicality of such a move.
The plan first started to emerge early Tuesday afternoon as Musk fired off a series of tweets suggesting Tesla had secured the funding needed to go private at $420 per share. The stock started to surge as the tweets rolled in, with investors seemingly also reacting to reports that the Saudi sovereign wealth fund had recently built a 3% to 5% stake in the company.
Trading of TSLA was actually briefly halted as Musk clarified the go-private plan in an official blog post, which proved to be an interesting bit of reading. Musk used the brief open letter to, once again, lash out at short sellers, saying that being public “means there are large numbers of people who have the incentive to attack the company.”
“As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders,” said Musk.
These comments were met with some criticism from skeptics who quickly pointed out that many of Musk’s recent actions—including his controversial conference call behavior, involvement with the Thai cave rescue, and even yesterday’s spontaneous Twitter announcement—had also served as major distractions for the company.
Nevertheless, Tesla shares continued to march higher after trading resumed, and all in all, the stock booked gains of about 11% on the day. Still, Tuesday’s close was about 10.7% off from the $420 go-private price suggested by Musk.
So who would be willing to pay that premium, and how exactly would a go-private deal work for a company of this magnitude? Well, Tesla would have to buy back all of its public shares, meaning the supposedly-secured funding would have to amount to about $70 billion.
Presumably, Tesla’s major shareholders would like to have a word on that type of offer, but finding one of those willing to discuss the plan proved a fruitless task on Wednesday. Musk is the company’s largest shareholder with his 20% stake, and Tesla’s next three largest shareholders—T.Rowe Price, Fidelity, and Baillie Gifford—declined to comment on the proposal, according to CNN Money.
Typically it is investment firms like these that would provide the capital needed to take a company private. But in all fairness, this does not appear to be a very typical situation.
One of Musk’s tweets indicated that Tesla shareholders would have the choice between selling their positions or holding on to partial ownership of the private company, which does not seem like a standard go-private move and raises even more questions.
Starting to get confused? Us too! If it helps reassure you at all, we can at least confirm that Musk was not making things up on the spot on Twitter yesterday, as Tesla’s board said today that the CEO pitched the plan and ideas on how it could be funded last week.
So with that in mind, let’s just stick with what we know. Whoever might be buying Tesla is going to be stuck with an entity that has about $2.2 billion in cash and $9.5 billion in debt. Step one for the newly-private automaker would be patching up the balance sheet and ensuring it has the money needed to continue expanding production.
But funding a Tesla buyout would not be simply purchasing risk; one would also be taking a massive stake in a top electric car brand with a loyal following. That could prove to be quite the move as the industry continues to adapt and evolve.
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