For eight years, since 2010, the electric car maker Tesla has enjoyed robust growth, even though it has never turned an annual profit. Today, the company is valued at between $60bn and $70bn.
For the company’s investors, Tesla’s CEO Elon Musk is a visionary whose electric car is giving us a glimpse into the future that successfully integrates clean energy with transport and home power. But the company produces only a fraction of the cars that close competitors Ford, General Motors and others produce.
In recent months, it has been beset by recalls, a Security and Exchange Commision investigation and, most recently, a pair of tweets by Musk that have left shareholders and critics wondering if Tesla is on the verge of profitability or if the car maker meets technology innovator is in a bubble.
In early August, the Financial Times reported that Saudi Arabia’s sovereign wealth fund had quietly been building a 4.5-4.6 percent stake in Tesla. Within half an hour, Musk took to Twitter, saying he was considering a leveraged buyout that would take Tesla private. Days later, her reassured shareholders that the company would remain public, for the time being.
In this week’s Counting the Cost, Al Jazeera asks Arash Massoudi, the Financial Times editor who broke the story of Saudi Arabia’s stake in Tesla, what may have been behind Musk’s tweets and earlier hints that his company was poised to organise one of the biggest leveraged buy-outs in history.
Editor’s note: the following interview has been edited for brevity.
Al Jazeera: What is the latest that you’re hearing on the company possibly going private? Obviously, Mr Musk has been tweeting about this and it’s caused quite a ripple in the financial community – but what exactly is going on?
Arash Massoudi: As far as I can tell, it was unprecedented in terms of corporate finance battles and take-overs in history where a CEO takes to social media and amplifies basically another organisation’s story and uses it to really change the narrative around his company.
Musk may have taken some actions which violated Securities and Exchange Commission policies which have sparked a series of investigations into his actions, and as a result, also, left him scrambling to put together this plan and make it look like there was more meat than there was actually on the bone. And so, at the moment, banks are all running around and trying to figure out whether they even want to work with him on this, because it’s such a wild proposal and seemingly unrealistic and at the same time not wanting to miss out on potentially the largest leverage buyout in history.”
Al Jazeera: And on the all important question of profitability, when do you think it might turn a profit?
Arash Massoudi: There’s no indication that Tesla will turn a profit anytime soon. It’s burning cash at a phenomenal rate. It can barely produce a couple thousand cars a year, it can’t keep up with demand from consumers, and so there’s no sign of profitability in the foreseeable future. And then you hear constant stories about problems with the cars, problems with deliveries and it’s a sort of endless stream of negative news – but what keeps this company going and what keeps investors there is this sort of cult-like icon of Elon Musk where he can captivate the market into seeing the vision. He just dreams big.
We’re in a world where, as one person wrote, Silicon Valley entrepreneurs are creating these real micro start-ups that have no real direction but that will create profitable companies for their enterprise. But Elon Musk doesn’t do that. Elon Musk sets visionary ideas out and says I’m going to change the way transport works, I’m going to change the way energy works … and then he lays out these really attractive narratives which, obviously in a world where there’s small ideas, we all want big ideas – so that can captivate the market and investors who are willing to back an entrepreneur.
But the facts and the details, when you dig into them, present a much murkier picture, and that’s why so many people have bet against Tesla’s stock. It’s one of the most bet against stocks in the US market and there are a lot of people who expect this company to come crashing down and who have bet a lot of money against it.
Al Jazeera: Is this really sustainable? If you talk there about the negative side of this, problems supply lines and all … is this a bubble that’s going to burst?
Arash Massoudi: The Tesla story is part of the story of where we are in the world right now. There are so many bubbles in the world right now. We’re in a real-estate bubble, we’re in a technology bubble and Tesla sort of encapsulates one of these bubbles. The way they can get through this is if they actually just focus on building cars and delivering their demand. That is clearly the best way to run this company. If he can meet the thousands of supply orders he’s already registered and deliver those cars to consumers, then you could see a foreseeable run rate for Tesla to survive.
But this is a company that produces a fraction of what Ford, GM, etc, produce on an annual basis and yet it has a higher market value. At some point, reality will catch up if Musk can’t deliver.
Al Jazeera: Why would Elon Musk want to bring the market into private hands?
Arash Massoudi: That feeds into one of themes of our time which is that the markets are extremely short-term oriented and that investors want profits and returns on their profits. If you think about all the activist investors that are squeezing pennies out of companies and torturing CEO’s for more capital return, who are more aggressive on action. We’re sort of in this rampant environment where hedge funds and portfolio managers are demanding a maximum amount of stuff from big companies and it’s oftentimes very hard to deliver. And, you couple that with the ego of someone like Elon Musk … You can see through his actions that it’s almost like a personal vendetta, that he wants to burn through the short-sellers and prove them wrong.
This has created an incredible distraction around him, around his company and himself, where he’s not focused on the execution. So, I think part of his thinking is if I can get this company private, then I don’t have to focus on these massive distractions and I can do that. The problem is, it’s really cute to want that, but also you relied on the public markets to get to where you are. You didn’t magically become a $60bn company without having sold things to investors or having sold things to the public.
One other major topic here is the corporate governance around Tesla. The board includes his brother. It’s “lead independent director” is someone who’s been named in court filings as his ‘close friend,’ so it’s basically a mockery to corporate governance, the tesla board. And that’s another big issue that’s under examination now is how can a US company have such a captured board that is close to the CEO.
Al Jazeera: What would the implications be for Tesla shareholders if there’s a private buyout, both for institutional and individual shareholders?
Arash Massoudi: In a traditional sense, if you want to take a public company private, the easiest way to do that is through a “leveraged buyout” where you take a slice of equity and a bunch of borrowing and you saddle the company up. You offer a premium to the share price and everyone gets a premium and sells their shares and then you take the company private with your new ownership team.
Unfortunately, that only works when you have a cash-flow positive company, because creditors don’t want to lend you money if you’re burning through money and have no capacity to pay back the money, so to basically launch the world’s biggest leveraged buyout in history is impossible here and therefore none of the world’s major banks will participate in such a plan – because Tesla doesn’t have the capacity to repay its debts.
So, then you have to find another way and the idea that they’re discussing is this “going dark” philosophy where a small group of shareholders will buy out other shareholders and take the company private with minimal equity checks, which is why everyone got excited about the way Musk spun the Saudi line that we [Financial Times] broke. Unfortunately, my reporting suggests that the Saudis have no intention of spending an extra $5bn, $10bn or $15bn to take the company private and if they had discussions, it was very, very informal and not of the nature and development that Musk may have suggested through his tweets and his subsequent communications to the market.
Al Jazeera: What’s in it for the Saudis?
Arash Massoudi: No discussion of Saudi Arabia can take place these days without discussion of the prince, Mohammed bin Salman, the gregarious 32-year-old who is leading the country, trying to transform its economy … and the vehicle through which he’s doing that and to take the country’s reliance off of oil is the country’s sovereign wealth fund, which is called the Public Investment Fund. It has about $250bn in assets and he wants to grow it to $400bn by 2020, he wants 25 percent of those assets to be in overseas holdings and he’s clearly a guy who is attracted by people who have big ideas, who are trying to change industries.
That’s why they went and invested $3.5bn in Uber, that’s why they gave $45bn to Japan’s soft bank in Masayoshi Son, this incredibly large tech investment fund which everyone has been talking about for the last two years, it’s why he’s put a $1bn in Virgin Galactic with Richard Branson. It’s why he’s put up to $20bn with Steve Schwarzman in Blackstone … and this is very much in line with those bets, a big entrepreneur trying to change an industry, potentially even a hedge to Saudi Arabia’s oil based economy by investing in electric cars, and with Elon Musk.
And the way that I reported the story was to say that when Mohammed bin Salman went to the US in March and April of this year, he and the Saudi sovereign wealth fund soon after approached Tesla and said, “We’d be interested in buying newly issued shares to both help support your company, but also we’d like to be an investor.” And Musk, for whatever reason, did not accept that offer and the Saudis with the help of JPMorgan Chase built the stake in the Tesla stock in the subsequent weeks and months and it was private until I broke the story.
Source: Al Jazeera
