Funding not secured: Musk’s explanations about taking Tesla private does not work

Elon
Musk
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• In a blog post, Elon Musk attempted to explain why he
  said he had “funding secured” for a deal to take Tesla private
  last week.
• His explanation doesn’t hold water for anyone who
  understands finance, sovereign wealth funds, or the passage of
  time.

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Elon Musk has written a blog
post explaining
why he said he might take Tesla private at $420 a share on
Twitter. “Funding secured,” he declared in the tweet.

But after reading Musk’s new post, the only conclusion to be
drawn is that funding was, in fact, not secured.

And that
could spell serious trouble for Musk. 

In a nutshell, Musk said that he spoke with Saudi Arabia’s
sovereign wealth fund, the Public Investment Fund (PIF) on July
31 and that the person he spoke to expressed an interest in
taking Tesla private. Musk said his Saudi investors had been
thinking about this since early 2017. Musk considered that all he
needed to say “funding secured.”

“He strongly expressed his support for funding a going
private transaction for Tesla at this time,” Musk writes. “I
understood from him that no other decision makers were needed and
that they were eager to proceed.”

But there are some obvious problems with this, one of them being
price. Wall Street, which is chomping at the bit for big deals as
always, estimates that a traditional leveraged buy out of Tesla
would require around $66 billion in cash.

In other words, Saudi money
alone would not be able to finance such a deal. 

What’s more,
the WSJ reports that two people familiar with the matter at
the PIF said they “doubt there are any serious discussions under
way about the fund taking a significantly larger stake in Tesla.
Indeed, the fund is struggling to find ways to finance its
existing commitments.” 

As it turns out, after Musk announced the possibility of the
deal, he reengaged the Saudis on August 7 and found that he would
need more than one person at the fund to approve his deal. The
Saudi involvement would be “subject to financial and other
due diligence and their internal review process for obtaining
approvals.”

As for this inconsistency between July 31 and August 7,
perhaps Musk simply has no idea how sovereign wealth funds
work. 
If, as Musk said, his Saudi shareholders
had been interested in taking Tesla private for almost two years,
it seems odd that they wouldn’t have already been asking
questions about how a deal would work, or about things like
regulatory requirements.

Now, as I said before, the Saudis alone cannot finance this deal.
And Musk wrote in his blog post that he had planned all along to
talk to Tesla’s other investors. 

“I continue to have discussions with the Saudi fund, and I
also am having discussions with a number of other investors,
which is something that I always planned to do since I would like
for Tesla to continue to have a broad investor base,” he
wrote. 

So, in that scenario, this back and forth between them and Musk
is just the tiniest of steps on the way to securing funding. It
certainly is not “funding secured.”

And then there’s the question of the deal structure. Musk
addressed that issue in his blog post too. He wrote:

“Reports that more than $70B would be needed to take Tesla
private dramatically overstate the actual capital raise needed.
The $420 buyout price would only be used for Tesla shareholders
who do not remain with our company if it is private. My best
estimate right now is that approximately two-thirds of shares
owned by all current investors would roll over into a private
Tesla.”

There are a couple issues with that statement from a finance
perspective:

1. What Musk is talking about is a stock swap in which investors
   would exchange their currently liquid Tesla stock for illiquid
   private shares.
2. He has absolutely no way of knowing who would take that deal
   since he hasn’t asked. Some investors may not be able to hold a
   private company at all.
3. With 2,000 investors or more, Musk would still be subject to
   reporting requirements. This means he wouldn’t be totally free of
   public scrutiny, defeating some of the purpose of taking the
   company private.

What’s more — and perhaps this only matters to poindexters
and finance geeks — but Tesla has yet to file official SEC
paperwork about this event, which is raising eyebrows all over
the deal universe.

Tesla’s stock is down slightly after Musk’s blog post,
reflecting the idea
that the market is not pleased with his explanation. In fact,
the stock has given back all of the gains it made since Musk made
his going private announcement. The SEC is looking into the
accuracy of Musk’s statement.

If funding was not secured and he knew it, he could be
charged with stock manipulation.

And, according to Musk’s own words, the deal sounds far
from done.

“I left the July 31st meeting with no question that a deal
with the Saudi sovereign fund could be closed,” Musk wrote,
“
it was just a matter of getting the process
moving.”

Get the latest Tesla stock price here.