Streetwise Professor

August 13, 2018

Elon’s Magical Mystery Tour Gets More Magical By the Day: $80 Billion Is Only the Beginning

Filed under: Economics,Energy,Regulation — cpirrong @ 8:14 pm

The Elon Magical GoPrivate Mystery Tour gets more magical by the day.  Today Elon tried to do some ‘splainin’, but his explanation was effectively a guilty plea.  He said that he left a late-July meeting with the head of the Saudi investment fund convinced that it would fund the transaction.

Legal memo to Elon: “secured in my mind” is not the same as secured, secured, all legal and such.  Even if–especially if–you are a legend in your own mind.

Musk’s explanation is more of a guilty plea than a defense.  The intersection between “funding secured” and “conversations are ongoing” is a set of measure zero.

Then there’s the magical structure.  As I noted in an earlier post, he wants it all ways.  He wants to be a private firm, but still have a herd of small shareholders.  In other words, he wants a structure that does not exist, most likely because it violates the securities laws.

There’s also another issue that has received no real attention, though it should.  All of the figgerin’ I’ve seen so far just totes up the amount of money required to buy out Tesla shareholders at $420/share.

But that’s just the start!  Tesla has been a cash bleeder for years, and has gone to the secondary offering well again and again to raise the money necessary to fund its operations and capex.  There is no prospect of that ending soon–indeed, one of the reasons I suspect Elon is throwing this Hail Mary is the fundamental inconsistency between his recent assertions that no additional capital raises would be necessary and the need for further funds.

So any sugar daddies will not merely have to stump up as much as $80 billion to buy the outstanding equity–they will have to commit to fund it while it continues to be cash flow negative to the sum of ~$500 million-$1 billion per quarter.

Going private deals are usually done for cash-flow positive companies.  They are levered up and use the cash flows to service the debt.  The PE dealmakers extract cash at the beginning, and definitely don’t plan to inject more cash for the indefinite future. That traditional framework obviously can’t work for Tesla.  So not only is the legal structure that Musk has mooted a figment of his imagination, the economic model is also fantastical.

But other than that, the deal sounds totally great, Elon.

One final note that makes me chuckle.  Elon made his big announcement on Twitter.  He has also blocked a lot of people on Twitter–including me in 2013 or 2014.  Well, selective disclosure of public information–giving it to some people earlier than others–violates Reg FD (“Regulation Fair Disclosure”).  So by (a) blocking me (and many others) on , and (b) running his big brain waves through Twitter, Elon might have committed other securities violations.

Hahahaha.

 

 

 

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3 Comments »

  1. I think that maybe Musk’s problem is that he (and his companies) have found so many (undeniably impressive) ways to have their cake and eat it in engineering problems (Rockets that are re-usable but also cheap, cars that are electric but also have long range, solar panels that look like regular roof tiles) that he is trying to do the same in finance.

    However, the engineering domain and the financial domain are obviously very different. It reminds me of a strip on the geek comic “xkcd”, where the geek character is buying insurance and says, “Hey, what if I-” and the insurance salesperson interrupts him and answers that the “cool hack you just thought of is “called “insurance fraud”. We already know about it and it’s a crime”.

    Comment by HibernoFrog — August 14, 2018 @ 2:35 am

  2. The link, for anybody interested:

    https://xkcd.com/1494/

    Comment by HibernoFrog — August 14, 2018 @ 2:36 am

  3. I bet the Saudis were ‘surprised’ by this announcement, more than anyone. Odds on them pulling out or driving an even harder bargain? Does have me in mind of your favourite bete noir, one Vladimir Putin, during his ill-fated trip to China in 2014 to negotiate what RT and other Russian state media organs were trumpeting as ‘the deal of the century’. Unsurprisingly the canny Chinese used this epic negotiating fail to their advantage, and nothing more was heard of whatever deal was finally struck.

    Comment by David Mercer — August 16, 2018 @ 2:44 am

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