Douglas Battista: Tesla Going Private?

Douglas BattistaIn August, Elon Musk announced his desire to take his company, Tesla, private. After this process, which is known as a leveraged buyout, Tesla would no longer be a publicly traded entity. Here, Douglas Battista keeps us up to date on the latest from Elon Musk and the Tesla company.

Q: When did Elon Musk announce his desire to take Tesla private?

Douglas Battista: On August 7th, Elon Musk made a public statement that he was interested in making Tesla a private company. Later that day, he sent an email to his employees explaining his rationale for the decision, which is not yet final.

Q: What benefit would Tesla receive by doing so?

Douglas Battista: First, it is important to know what a leveraged buyout (LBO) is. An LBO is the practice of a company’s management, founders, or others with a connection to the firm buying said company using outside funds, muck like buying a home. A “down payment” equating to 10- to 40 percent is almost always required. Usually, the money is borrowed using the company’s projected cash flow as security. Musk noted that pulling out of public trading would protect Tesla from volatile market shifts.  

Q: Where would the money for the proposed buyout come from?

Douglas Battista: For some time, Musk has been in contact with managers of the Saudi Arabian Sovereign Wealth Fund. Managers of the fund reached out to Musk in 2017, citing a desire to reduce the country’s dependence on oil. Between the time of initial contact and now, the Saudi fund purchased, on the public market, a 5 percent equity in Tesla. Once this stock was secure, ostensibly in an effort to prove interest in the company, fund managers approached Musk again.

Q: Would Tesla’s LBO burden the company?

Douglas Battista: Musk noted in his announcement that the buyout would be funded by equity as opposed to debt. Musk feels adding to Tesla’s debt is not the right thing to do for his company. It’s also important to note that he is speaking with other investors and plans to fully outline all options as potential deals are discussed.