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COMMENTARY

Tesla buyout would need to go short on leverage

New York

ELON Musk has set up a new diversion for the electric-car maker he runs. On Tuesday he announced on Twitter he is "considering taking Tesla private at US$420. Funding secured." That's not as big a long shot as it might sound. But a buyout would have to be short on leverage.

Mr Musk's putative offer values Tesla at some US$72 billion. Although US regulators have softened their stance on leveraged lending recently, banks would probably lend only around a third of that to keep debt within six times EBITDA. Be generous and apply that to Morgan Stanley's estimate of almost US$6 billion of EBITDA in 2022. After stripping out Tesla's current debt, that leaves around US$25 billion to purchase shares.

That may look like Mr Musk would be US$50 billion adrift of his goal. But he's not selling his own 20 per cent stake. And he still commands a lot of faith among his shareholders. Before his latest tweets, the stock was trading around 40 times estimated earnings for 2020, according to Thomson Reuters I/B/E/S. That suggests plenty of smaller investors would probably go along for the ride and take up Mr Musk's offer to keep their stakes if Tesla goes private.

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Investors aplenty

For the same reason, he should be able to persuade many of the top 20 owners to stay in the passenger seat. They own more than 50 per cent of the stock. Even if a good number chose to exit the vehicle, there are plenty of other investors to chase after. The Saudi Public Investment Fund, for example, has built a US$2 billion stake this year, the Financial Times reported on Tuesday. SoftBank has already injected money into Uber and General Motors - and its Vision Fund has amassed an almost US$100 billion war chest.

The visionary founder has appeared irritated by his lost status as the irreproachable wonder boy of Silicon Valley.

Recent criticism about missed production targets and capital needs has gotten under his skin; in May he derided analysts for asking "boring, bonehead questions". Tesla is also the most shorted stock on US bourses.

Driving the company off the public market would remove many of these irritants. Granted, it wouldn't solve the "production hell" Tesla has been in for over a year. But that's all the more reason to avoid the treacherous conditions a blizzard of debt can create.

Shares in Tesla jumped more than 10 per cent on Aug 7 after chief executive Elon Musk tweeted: "Am considering taking Tesla private at US$420. Funding secured." Trading in the stock was halted shortly afterward with the shares up 7 per cent at US$367.25. They later rose to US$379.57, up 11 per cent for the day.

Ease public pressure

In a subsequent blog posted on Tesla's website, Mr Musk said that while no final decision had been made, "the reason for doing this is all about creating the environment for Tesla to operate best." Swings in the stock price "can be a major distraction for everyone working at Tesla, all of whom are shareholders," he wrote.

Going private would also free Tesla from the pressure of the quarterly earnings cycle and of short-sellers, he said, adding that "being public means that there are large numbers of people who have the incentive to attack the company."

Mr Musk said he hoped current shareholders would keep their stock. Investors in a privately held Tesla would probably have a chance to buy and sell stock every six months, as is the case at another of his companies, SpaceX. He said his own stake of about 20 per cent would not be "substantially different" if the plan were to proceed. He also wrote that "once Tesla enters a phase of slower, more predictable growth, it will likely make sense to return to the public markets." REUTERS BREAKINGVIEWS