Several Tesla Inc shareholders have told Reuters that they are concerned that the electric car manufacturer will have to pay more to finance its growth if it becomes a private company and loses the possibility of offering new shares to investors. to sell on the stock market.
This problem has come to the fore because a special committee of the Tesla board considers the idea of Chief Executive Elon Musk to take the loss-making business privately in a deal that can be worth $ 72 billion.
Tesla, whose bonds as & # 39; junk & # 39; reviewed by credit rating agencies due to the $ 11 billion debt stack and the negative cash flow, the fund has invested six times in the past eight years through stock sales, raising nearly $ 4.3 billion, according to Dealogic data.
Without that easy access to capital, Tesla investors who would consider keeping their interest in a private Tesla – as Musk has suggested – ask themselves how Tesla would finance itself as a private company.
"It comes down to it when you can afford to be private and if you can get funding, and what the cost of that funding is," said Craig Birk, chief investment officer of Personal Capital Advisors Corp. a Tesla shareholder holding approximately 97,000 shares as of 30 June.
Musk shocked investors last week with a tweet that he considered Tesla private for a price of $ 420 per share and that the financing was "secured".
He stated Monday that he believed Saudi Arabia s PIF, a new shareholder in Tesla, could provide the necessary funding, although sources near the fund for sovereign wealth have missed that prospect.
The 47-year-old entrepreneur and engineer said this week that he believes that two-thirds of existing Tesla shareholders would transfer their positions to a private company, instead of paying out, and that he would still be in discussions with large shareholders and advisers. before they reached a structure for a deal. It remains unclear how a deal would be financed.
Musk has mentioned his long-standing vendetta with sellers, who bet that the shares of Tesla will fall, as well as Wall Street's short-term focus on quarterly results, such as reasons to take the company privately. However, the implications for company financing show that leaving the stock market is likely to be accompanied by costs for Tesla.
Musk said on Monday that he did not want to burden Tesla with more debts, which means that it must rely on private fundraising rounds such as Uber Technologies Inc and other venture capital-backed companies, which are likely to make much higher capital costs.
Estimates of how expensive private equity fundraising is compared to secondary stock sales on the stock market vary. Venky Ganesan, an investor at Menlo Ventures, said in an interview that capital costs – the return that an investor needs to convince them to make a certain investment – are on average 17 percent to 18 percent for private companies compared by 6 percent to 7 percent for public companies.
"The main drawback of private going is the higher capital costs that investors demand for the lack of liquidity, and which can buy and sell at a fair price in the short term," Jacobs Thomas, professor of accounting and finance at the Yale School of Management, wrote earlier this month on the website of the university in a post about Tesla.
The issue of funding is not only academic. Tesla burned $ 3.4 billion in cash last year and said it wants to invest another $ 2.5 billion this year.
Musk has repeatedly said since April that Tesla does not have to raise any new capital. But analysts expect that Tesla will need billions of dollars in the coming years to finance its expansion plans and to develop new electric premium vehicles to beat German rivals.
In addition, the Gigafactory battery outside of Reno, Nevada is still only partially finished, and Musk has said that an announcement about a European factory is likely to come at the end of this year.
Another important point for Tesla is the recently announced China plant in Shanghai, although Musk has said the financing for the cost of roughly $ 2 billion would come from local debt.
Access to cheap capital is a constant challenge for car manufacturers, who can spend $ 1 billion or more on a single new model and bring it to mass production, only because the vehicle is flopping due to a cyclical sales slump or a shift in market taste.
Mainstream car manufacturers historically have not earned their capital costs of around 9 percent because investments in new models generate new technology and production equipment insufficient profit, said the late Fiat Chrysler Automobiles SA chief executive Sergio Marchionne in an investor presentation of April 2015. [19659002] Three new vehicles are under development at Tesla, the compact compact SU of model Y, a new $ 200,000 Roadster and an electric heavy-duty truck that Musk unveiled last November, with start dates of production in 2019 and 2020.
Analysts say that a lot will depend on the forecasts that investors make about the profitability of the company for the coming years. The faster Tesla can make a big profit, the easier it can finance itself.
"Tesla is clearly capital-intensive … but it is also a disruptor that grows crazy, making it perhaps more related to growth technology companies," wrote Bernstein analyst Toni Sacconaghi in a study letter on Thursday.
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