As pressure mounts on Tesla founder Elon Musk to detail his plan to take the company private, the FT looks at the potential sources of funding.
Pros: History of daring tech investments
Cons: Sense that Tesla is overvalued; regulatory obstacles
Thanks to its near-$100bn Vision Fund, Masayoshi Son’s SoftBank is linked to most tech deals. SoftBank has made aggressive moves in ride-hailing where it owns stakes in Uber, China’s Didi Chuxing, Brazil’s 99, India’s Ola and south-east Asian group Grab. In May, it also unveiled a plan to invest up to $2.25bn in General Motors’ self-driving car unit.
However, people close to SoftBank tell the FT that the fund considers Tesla to be overvalued and there are no indications it wants to invest. Even if it did want to add Tesla to its stable, SoftBank may face an obstacle in the form of the Committee on Foreign Investment in the US (Cfius), given its close links to China and record of previous hold-ups on other deals.
Pros: Strong appetite for big dealmaking
Cons: High level of regulatory scrutiny under Cfius climate
Tencent, the giant internet group behind the WeChat messaging service, has been undeterred by a crackdown on Chinese dealmaking into the US. Last year, it acquired a 5 per cent stake in Tesla, paying about $1.7bn. Other high-profile stakes include a position in Snap, the US social media company, and Sweden’s Spotify.
This ravenous dealmaking has dented its financial firepower — it swung from net cash to net debt of Rmb14.5bn in March — and its shares have suffered this year, but it retains a market value of more than $440bn. It is unclear, however, whether a further stake acquisition would require Cfius approval and a fuller participation in a take-private is likely to trigger opposition.
Elon Musk’s plans for Tesla
Sovereign Wealth Funds
Pros: Largely unrivalled war chests; taste for tech investments
Cons: Cfius concerns and other regulatory limitations
Saudi Arabia’s sovereign wealth fund has quietly built a near 5 per cent position in Tesla in recent months, the Financial Times revealed this week. That makes the Public Investment Fund, the vehicle being used by Saudi’s powerful crown prince Mohammed bin Salman to diversify his country’s economy, a logical investor. The PIF has $250bn of assets under management and a goal of reaching $400bn by 2020. The fact that the PIF has already expressed interest in buying primary shares in Tesla before it acquired the shares in the secondary market suggests there may be willingness to do more. However, the Cfius concern also applies here.
Closely linked to Prince Mohammed and the PIF is Mubadala, the sovereign wealth fund of Abu Dhabi. Aligned in geopolitics and sharing a close friendship between their rulers, the PIF and Mubadala have lined up to contribute $60bn to the near $100bn SoftBank Vision Fund. Mubadala also has a history of making tech investments and it is the owner of Global Foundries, a major chipmaker which it successfully received Cfius clearance to acquire back in 2012.
The involvement of Qatar’s sovereign wealth fund, the Qatar Investment Authority, seems unlikely given the dispute between the Gulf country and Saudi Arabia. Chinese sovereign wealth funds would almost certainly be barred by Cfius.
Singaporean state funds Temasek ($225bn in assets) and GIC (about $400bn) have both been hugely active in tech and finance investing, particularly in the US. They are extremely likely to be approached.
Norway’s $1tn oil fund is another possibility, but it is not permitted to own more than 10 per cent of a company and never has done any kind of buyout to date.
Pros: Long track record of leverage buyouts
Cons: Disinclination towards heavily leveraged companies
Junk bonds were the 1980s solution for buying a company you could otherwise not afford. Tesla is already well acquainted with the market: the automaker has more than $10bn of debt on its balance sheet already.
The FT View
Tesla tests the pros and cons of public markets
In a traditional leveraged buyout, a private equity fund would stump up some equity to buy a company and finance the rest with debt. But Tesla’s meagre cash flows make that a challenge. Analysts with Moody’s estimated in March that the company’s debt load would be eight times larger than its earnings over the next year to 18 months.
That is far above the level that regulators allow when banks lend to companies, which is capped at roughly six times earnings before interest, taxes, depreciation and amortisation. The so-called six-times level is not a hard rule; if banks can show that the company’s cash flows are high enough to pay off a certain amount of debt they can often still provide the funding.
But even there, Tesla will struggle. Its cash flows are negative. Several bankers said they were unaware of any attempt to assemble a huge debt package.
Mr Musk would not be the first person to attempt to take a company private and bring some public shareholders along for the ride. The practice was used ahead of the financial crisis by private equity group KKR and Goldman Sachs’ private equity arm when they sought to buy out Harman International for $7.8bn.
The two groups set aside up to $1bn of the equity in the company for then-shareholders. Known as stub equity, the shares allowed investors to line up next to their larger brethren and participate in any further upside in the company. The deal ultimately collapsed.
Pros: Long-term, sizeable shareholders
Cons: Risk aversion; regulatory restrictions
Mr Musk has suggested that shareholders including mutual funds Fidelity and T Rowe Price, which together hold 17.4 per cent of Tesla, could roll over their stakes, greatly reducing the amount of capital needed to finance the take-private.
But institutional investors say they need to see the substance of any take-private proposal.
Baillie Gifford, the Edinburgh-based fund manager which is Tesla’s third-largest institutional investor with a 7.8 per cent stake, said: “As long-term shareholders, we will take time to reflect upon this development.”
Scottish Mortgage, Baillie Gifford’s flagship FTSE100 investment trust, owns 5.7 per cent of that stake. Scottish Mortgage’s level of unlisted investment would rise to about 18.5 per cent in the event of a take private transaction, still lower than the 25 per cent cap it has on unlisted stocks.
However, other funds are subject to much lower ceilings on the proportion that can be invested in unquoted securities.
Janus Henderson, the US-Australian asset manager and a top 50 Tesla investor, expressed early support for a potential take-private of the electric carmaker. “We would likely want to remain shareholders,” said Hamish Chamberlayne, who holds the stock in his Global Sustainable Equity fund.
Silicon Valley friends
Pros: Cosy connections; tech expertise
Cons: Lack of scale and required financial firepower
As part of the “PayPal mafia” Mr Musk has some of the most gilded tech connections imaginable — ranging from early Facebook investor Peter Thiel to LinkedIn founder Reid Hoffman. The handful of billionaires have a history of investing alongside each other and a wide range of Silicon Valley start-ups. That includes Mr Musk’s spaceflight business SpaceX, which counts Mr Thiel and former PayPal board member Scott Bannister as investors.
But it is one thing to invest venture capital into a new fledgling company, it’s another thing entirely to back a massive buyout. It seems unlikely the venture capitalists have the desire or firepower to participate in something of this scale.