Economy

Tesla Buyout Plan Poses Big Risks For Investors

Tesla Buyout Plan Poses Big Risks For Investors

'Am considering taking Tesla private at $420, ' Musk tweeted, referring to the value of the share price he would have to pay.

Ironically, Tesla's shares shot up by 11% following his tweet.

Last week, Tesla said in its second-quarter update it will generate positive profits and cash flow going forward absent a severe economic downturn. The company declined to comment beyond pointing to an all-employee email sent Tuesday by Musk.

But as the dust settles on Musk's latest Twitter escapade, questions remain over whether the Tesla chief executive broke SEC guidelines by tweeting the news.

Musk owns an nearly 20 per cent stake in Tesla, meaning he'd still need roughly $70 billion in financing to take Tesla private.

If the content of Musk's tweet was not true, lawyers argue, it could expose Tesla's mercurial chief executive officer and the company to regulatory action and private lawsuits. Many initially thought it was Elon Musk's attempt at a bad joke about marijuana, because "420" has always been associated with pot.

It wasn't until Wednesday when six directors on Tesla's nine-member board publicly acknowledged that Musk approached them last week about pursuing the financing for a buyout that would take the company off the stock market.

Since Musk hasn't provided any evidence or details about the funding, a number of people are skeptical about his claim.

Some on Wall Street shared that view.

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However, he may not reap an instant reward in the event that Tesla goes private at $420 a share.

Tesla is now valued at $63.8 billion.

The most obvious equity partners for Mr Musk would be a sovereign wealth fund such as Saudi Arabia's Public Investment Fund (PIF), which sources said had taken a stake of just below 5 percent in Tesla, or a major technology investment fund such as SoftBank Group Corp's Vision Fund, bankers said.

Buying Tesla in its entirety would cost US$72b, based on the company's outstanding stock as of July 27.

The company is still working its way out of what Musk called "production hell" at its home factory in Fremont, California, where a series of manufacturing challenges delayed the ramp-up of production of its new Model 3 sedan, on which the company's profitability rests.

He's also Tesla's largest shareholder.

Those who believe Musk is carrying out a vendetta against short sellers may point to a May 4 tweet suggesting he might have something up his sleeve.

Names excluded from the board statement were Musk; his brother, Kimbal Musk; and Steve Jurvetson, a venture capitalist and early Tesla backer who's been on leave since past year.