Market Stunned After Musk Discloses Intention To LBO Tesla, Lawsuits Threatened

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Market Stunned After Musk Discloses Intention To LBO Tesla, Lawsuits Threatened

Update 10: After all that, nobody has any idea what just happened, and a word being increasingly thrown around is lawsuit. As Yahoo's Rick Newman writes, if the LBO deal described by Musk with "funding secured" is true, it’s a boon for shareholders. But if it’s not true, Tesla is in trouble, and shareholders may feel the pain.

“If funding is secured, then it’s a factual statement,” says John C. Coffee, director of the Center on Corporate Governance at Columbia Law School. “But if he can’t prove that, he’s in some danger of a big lawsuit because short sellers will be devastated by this.”

On Aug. 7, Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” Those nine words sent the stock soaring from $342 to around $370, an 8% jump. Then the Nasdaq exchange temporarily halted trading in the shares, pending clarification of material news by the company.

About three hours after his momentous tweet, Musk posted a message to employees explaining his rationale for going private. He cited “wild swings” in the stock price and frequent attacks by short sellers as “a major distraction for everyone working at Tesla.” He cited Space X, the  rocket-launching company where Musk is also CEO, as an example of a privately owned company better able to focus on a complex long-term mission. “A final decision has not yet been made,” he said.

And some further observations:

If Musk’s aim was to temporarily boost Tesla’s stock in order to force losses on short sellers, it could be considered stock manipulation, which is illegal. “That’s too inviting to a plaintiff’s lawyer not to sue,” says Coffee. “This would be an attractive lawsuit. The people who think he’s manipulating the market would say they’ve suffered an injury, and you could pull all those losses together in a class action.”

If, on the other hand, Musk can demonstrate that he has actually arranged financing for a private buyout, or made serious efforts to do so, he might be off the hook.

Musk will now be under pressure to promptly disclose whether a buyout offer is serious and where the money would come from. The company is worth about $62 billion (after the Musk-tweet surge), and there would likely be a premium of 25% or more to entice current holders to sell, and give up future gains. At Musk’s price of $420 per share, the buyout would value the company at  around $71 billion

In short: if this was indeed Musk's final "burning" of the shorts, and an LBO is just a figment of his imaginations, it will be the shorts who will have the last laugh.

* * *

Update 9: After being halted for over an hour, TSLA stock has reopened at $371 and has risen to $381, up 11.5%. The record stock price is $385 on Sept 18, 2017.

The bonds, however, which have a 101 Change of Control put, are far less confident about the deal going through:

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Update 8: On its blog, Tesla has published the following email that Elon Musk sent to employees today, which appears to be merely another attack on Tesla shorts:

The following email was sent to Tesla employees today:

Taking Tesla Private

Earlier today, I announced that I’m considering taking Tesla private at a price of $420/share. I wanted to let you know my rationale for this, and why I think this is the best path forward.

First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.

I fundamentally believe that we are at our best when everyone is focused on executing, when we can remain focused on our long-term mission, and when there are not perverse incentives for people to try to harm what we’re all trying to achieve.

This is especially true for a company like Tesla that has a long-term, forward-looking mission. SpaceX is a perfect example: it is far more operationally efficient, and that is largely due to the fact that it is privately held. This is not to say that it will make sense for Tesla to be private over the long-term. In the future, once Tesla enters a phase of slower, more predictable growth, it will likely make sense to return to the public markets.

Here’s what I envision being private would mean for all shareholders, including all of our employees.

First, I would like to structure this so that all shareholders have a choice. Either they can stay investors in a private Tesla or they can be bought out at $420 per share, which is a 20% premium over the stock price following our Q2 earnings call (which had already increased by 16%). My hope is for all shareholders to remain, but if they prefer to be bought out, then this would enable that to happen at a nice premium.

Second, my intention is for all Tesla employees to remain shareholders of the company, just as is the case at SpaceX. If we were to go private, employees would still be able to periodically sell their shares and exercise their options. This would enable you to still share in the growing value of the company that you have all worked so hard to build over time.

Third, the intention is not to merge SpaceX and Tesla. They would continue to have separate ownership and governance structures. However, the structure envisioned for Tesla is similar in many ways to the SpaceX structure: external shareholders and employee shareholders have an opportunity to sell or buy approximately every six months.

Finally, this has nothing to do with accumulating control for myself. I own about 20% of the company now, and I don’t envision that being substantially different after any deal is completed.

Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees, as possible.

This proposal to go private would ultimately be finalized through a vote of our shareholders. If the process ends the way I expect it will, a private Tesla would ultimately be an enormous opportunity for all of us. Either way, the future is very bright and we’ll keep fighting to achieve our mission.

And, once again, zero mention of the "committed" funding, where the money for the LBO will come from, what the capital structure would look like, or any analysis for that matter.

Musk did decide to tweet again, however, and claim that "Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote." It wasn't clear how shareholders can vote for a deal without knowing who the investors are...

Elon Musk @elonmusk

Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.

Tesla @Tesla

Taking Tesla Privatehttps://www.tesla.com/blog/taking-tesla-private?redirect=no …

Twitter Ads info and privacy

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Update 7: With Wall Street patiently waiting for something resembling an 8-K which the company is scrambling to put together based on Elon Musk's tweets now that the stock is halted following the CEO's unexpected "LBO announcement" on twitter, Musk continues to tweet only in response to questions, and while he has ignored a question where the LBO funding will come from, when asked if investors could "invest once private", Musk responded "Yes, but liquidity events would be limited to every 6 months or so (like SpaceX)."

Derek M.@thatspacegeek

 · 

Replying to @elonmusk

Could we still invest once private?

Elon Musk @elonmusk

Yes, but liquidity events would be limited to every 6 months or so (like SpaceX)

Twitter Ads info and privacy

And then, in response to question if investors will be allowed to co-invest, Musk said "no forced sales" and added that he hopes "all shareholders remain. Will be way smoother & less disruptive as a private company."

And the punchline, which perhaps brought on the LBO tweetstorm to begin with, Musk said that an LBO "Ends negative propaganda from shorts." Of course, it also eliminates the possibility to force a short squeeze with a spurious narrative about taking a company with a multi-billion cash burn private at a valuation of over $60 billion, which would make it bigger than TXU, and the largest LBO in history.

MindField@MindFieldMusic

 · 

Replying to @elonmusk

At 1st I was upset bc I thought this would be a forced buyout. But if average folk like myself are allowed to reside with the garden walls along with you, then...
Yes please. </div>

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