Price will be central piece of Tesla buyout puzzle
Elon Musk floated $420 for his take-private deal
Since Elon Musk tweeted his plan to take Tesla private last week, sending Wall Street into a frenzy, the focus has been on whether he really has the funding he claimed to have secured for the deal.
The Securities and Exchange Commission on Wednesday subpoenaed the company, as part of an investigation into his public declaration.
But if Mr Musk does assemble a group of backers, another question will quickly come into focus: is his proposed $420 per share an acceptable price?
The Tesla boss said in a blog post that he guessed about two-thirds of shares held by current investors would roll over into the private company, suggesting that a clear majority believe $420 undervalues the lossmaking electric car maker.
However, Tesla’s large institutional investors, including Vanguard, BlackRock and T Rowe Price, own about 60 per cent of its shares, and several will be forced to sell most or all of their stakes if Mr Musk is successful at taking the company private — and the independent board committee set up to evaluate any offer from Mr Musk will have to protect their interests.
“The problem I see with the deal is that many existing investors do not want an illiquid stock or cannot by charter own one,” said Walter Price, a portfolio manager at Allianz Global Investors who holds a small stake in Tesla.
His funds would be unable to roll over into a private Tesla and unlikely to want to be forced out at $420. “The price is too low for most of our accounts to vote to sell,” he said.
At $420 per share, the price floated in Mr Musk’s nine-word tweet last week, a buyout bid or tender offer would represent about a 20 per cent premium over Tesla’s closing price the previous day. That would be less than most takeover premia.
Over the past 10 years, the average premium in takeovers larger than $1bn has been 32 per cent over the average share price in the month preceding the bid, according to data from Dealogic. In tech sector deals specifically, it has been 34 per cent.
Against Tesla’s average share price in the month before the tweet, Mr Musk’s offer represents a premium of 36 per cent, but most of that period was before Tesla’s recent bullish quarterly earnings report sent the stock higher.
Charles Kane, a longtime financial executive who now lectures at MIT, said based on his experience on a dozen boards, he would expect a bid in the range of a 30 per cent premium over the company’s undisturbed share price — that is, above $430. “It’s the duty of the board to assess whether or not the value that’s presented is appropriate in the long haul for the valuation of a company, weighed against the risks that are involved,” Mr Kane said.
Institutional investors may accept a narrower premium if they are unhappy with a company’s prospects, or its management, however. Also concentrating the mind: the consensus of analysts’ forecasts pegs Tesla’s share price at just $326 next year.
“The stock has never got to $420, so nobody can complain they aren’t getting a return on their investment,” said Philippe Houchois, an analyst at Jefferies who believes the fair value of Tesla is no more than $300 a share.
“If you look on a pure financial basis you’d tell everyone to take the deal. But a lot of people have commitment to Musk and his vision.”
Some investors have publicly indicated they would be happy to hitch their wagon to Mr Musk in a private Tesla. The greater the number of shareholders who want to stay in, the less Mr Musk needs to raise to buy out the rest.
Ross Gerber, founder and chief executive of wealth manager Gerber Kawasaki and a prolific defender of Tesla against its critics, told the Financial Times he would not sell his stake because he estimates Tesla is worth $571 a share, or $95bn.
Yet others of a bullish persuasion are none the less sceptical of a proposition in which they would sacrifice publicly-traded shares for an illiquid position in a private business. Mr Musk promised to return to the public markets “once Tesla enters a phase of slower, more predictable growth”.
Tasha Keeney, an analyst at Ark Investment Management, which holds Tesla shares in three of its funds, thinks Tesla will be a $600 share within five years based on the prospects for the electric car business. If it cracks the market for autonomous vehicles, in the longer term it could be worth many times that.
But, she said, “in general we’d like the company to stay public”. She likened Tesla to Amazon, a company that drew criticism for years for not producing profits, but which nevertheless commanded a handsome valuation as a public company. “Eventually the story came through and the stock was rewarded. We think the same could happen to Tesla,” Ms Keeney said.
Tesla shares closed on Wedneday at $338.69.