Elon Musk’s plan to privatize Tesla could make it the largest leveraged buyout in history, according to Bloomberg.
With current debt levels at $10.9 billion, and a track record of losses since its Initial Public Offering (IPO) in 2010, Musk’s announcement to purchase the company at $420 per share comes at a time when the company grapples with high consumer demand for its electric car, as well as losses calculated in the billions.
Debt financing and equity raising for Tesla would also be difficult given that the company is cash-flow negative.
For bondholders, the price jump of 11 percent to $379.57 at the close on Aug. 6, has meant that $2.3 billion of convertible debt could be transferred to stock for profit.
Convertibles give bondholders the right to trade their debt for equity after shares rise over a certain set price. The bonds conversion rate is $359.8676.
“This is a boon for any bondholder at Tesla, because most of the bonds are convertible notes,” Ross Gerber, chief executive of Gerber Kawasaki Wealth and Investment Management told Reuters.
Musk has also given current shareholders two options; they can stay as investors in the privatized company, or can be bought out at $420 per share.
Currently, the credit rating for Tesla is in junk-bond territory, which according to Investopedia, signifies “a higher risk of default because of an uncertain revenue stream or a lack of sufficient collateral.”
Tesla’s poor credit rating was due to a plunge in share price, which dropped to a low of $244.59 in April 2018, from its record high of $389.61 in September 2017. The main factor being the company’s struggle to meet production targets for its Model 3 sedan.
In addition, volatility in the stock exchange, due to short-sellers capitalizing on Tesla’s plummeting share price, placed the company as “the most shorted stock in the history of the stock market,” Musk said in an email to his employees.
‘Free from distraction’
According to Musk, privatizing Tesla would mean that the company can be “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” is his priority.
“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,” Musk added.
Musk’s move to privatize Tesla has made sense to some business analysts.
Gene Munster, managing partner at Loup Ventures told Bloomberg, “Elon Musk does not want to run public companies.”
“His missions are big and make it difficult to accommodate investors quarterly expectations. Our guess is there is a 1 in 3 chance he can actually pull this off.”
According to Bloomberg, “Funding $50 billion plus for a negative free cash flow business would be difficult, if not extraordinary.”
A vote to privatize Tesla is yet to be finalized by shareholders.
Reuters contributed to this report.