The SEC has sued Tesla’s CEO Elon Musk for lying about having funding secured for potential take-private of the company. The litigation is the latest chapter about the company, as both longs and shorts have strong opinions about the company’s future and valuation. The markets are pricing in an “Elon Musk” premium, and an ousting of him could be highly detrimental to the stock. Furthermore, the company has a high cash-burn and investors are worried Tesla needs to raise a substantial amount of capital to keep the operations going. Tesla’ share price has already taken over a 10% hit on the news today. It is down over 30% since highs.
The CEO of Tesla (TSLA US), Elon Musk was sued by the US regulator Securities and Exchange Commission (SEC) for fraud. The SEC is suing Mr. Musk for false and misleading statements and failed to properly notify regulators of material company events. The SEC complaint says;
Musk knew that he (1) had not agreed upon any terms for a going-private transaction with the Fund or any other funding source; (2) had no further substantive communications with representatives of the Fund beyond their 30 to 45 minute meeting on July 31; (3) had never discussed a going-private transaction at a share price of $420 with any potential funding source; (4) had not contacted any additional potential strategic investors to assess their interest in participating in a going-private transaction; (5) had not contacted existing Tesla shareholders to assess their interest in remaining invested in Tesla as a private company; (6) had not formally retained any legal or financial advisors to assist with a going-private transaction; (7) had not determined whether retail investors could remain invested in Tesla as a private company; (8) had not determined whether there were restrictions on illiquid holdings by Tesla’s institutional investors; and (9) had not determined what regulatory approvals would be required or whether they could be satisfied.
To summarize, the SEC claim Mr. Musk just made up having funding secured and had not conducted proper preparations for a take private, when he tweeted that he planned take the company private at $420/share.
The SEC wants to bar Mr. Musk from serving as an officer or director of any publicly traded company.
Mr. Musk responded to a statement to CNBC;
“This unjustified action by the SEC leaves me deeply saddened and disappointed,” Musk said in a statement to CNBC. “I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show I never compromised this in any way.
Post the announcement Tesla’s board came out in support for Mr. Musk. This surprised the market.
Tesla has been a “battleground” stock. Longs have argued that Tesla under Mr. Musk is the future of the automotive industry. The shorts believe that Tesla is not delivering the amount of Cars it promised. The company’s cash-burn is not sustainable, and that company’s valuation in relation to other auto companies is not justified.
There is a “Musk premium” in the Tesla stock. The question is how high is the premium. WSJ writes;
If Mr. Musk were forced to step down at some point, Tesla would be left without the visionary entrepreneur who has captivated investors with his grand ambition to replace the internal combustion engine with electric, self-driving systems. Tesla doesn’t have a clear succession plan nor an obvious No. 2 after droves of executives departed in recent years.
That could spook investors enough to send the stock price spiraling, hurting Tesla’s ability to raise the cash analysts say is required. Tesla is also reliant on the faith of its customers, many of whom are devoted fans of Mr. Musk and place deposits on future vehicles, such as the Roadster sports car, that add cash to the books.
Furthermore, markets are worried that DOJ will file criminal charges against Mr. Musk. That would almost automatically lead to Mr. Musk ouster.
On the balance sheet side, Tesla has over $10bn in debt, with a cash-burn of over $1b/quarter. As of end of Q2 the company had $2.2bn cash at hand. Tesla would need pay down $230m in convertible bonds in November and an additional $920m coming up in March. This is on top of the operating cash-burn. Most analysts believe the company needs to raise capital soon. Business Insider quotes the Goldman Sach’s analyst;
“Between its current operations, anticipated new product spend, and incremental capacity additions, we see Tesla potentially requiring over $10 billion in external capital raises and debt re-financing by 2020,” he said. “We believe this level of capital transactions may be funded through multiple avenues, including new bond issuance (secured and/or unsecured), convertible notes, and equity.”
You can discuss the validity of the arguments from both the longs and the shorts, but for now the market has given its verdict. Tesla’s share price is down over 10% in the morning session on Friday.
Others argue that it could be worse. It is only Mr. Musk that has been sued by the SEC and not Tesla the company. This latest news could lead to the ousting of Mr. Musk, a more experienced management team are brought in and focus will move over to strictly operational issues.
The short interest of the stock has recently increased to 35.33m share (28% of float). This points towards the fact plenty of traders believe things will get worse. Being short Tesla is possibly a crowded trade here?
Source: S3 Partners
We will continue monitor the stock as news develop.