Musk’s credibility in doubt after misstep
Shares in Tesla fell more than 3% in intraday trade on Monday after the electric carmaker abandoned a plan to go private, with some analysts suggesting it should either replace CEO Elon Musk or appoint another strong senior manager.
The billionaire entrepreneur said in a blog post late on Friday that consultations, done with the help of Goldman Sachs and Morgan Stanley, had shown most of Tesla’s existing shareholders opposed the deal that he proposed on Twitter three weeks ago to widespread shock on Wall Street.
Tesla’s shares, already down nearly 15% from a peak on August 7 when Musk tweeted that he had "funding secured" for a buyout at $420 a share, initially fell more than 5% in European and premarket trading in New York. They recovered, however, to stand 3.6% lower at $311.17 by mid-morning in New York.
A series of notes from Wall Street analysts questioned Musk’s credibility in the face of a possible investigation by the US Securities and Exchange Commission into the factual accuracy of the August 7 tweet.
"Musk’s involvement in the company is critical, but now more than ever a solid #2 — someone with strong operational background that can help Tesla move from ideas to execution — is crucial," analyst Joseph Spak from RBC Capital Markets wrote in a client note.
Tesla said on Sunday it was not searching for a COO. "While we are always looking for highly talented executives … there is no active COO search," a spokesperson said by e-mail.
With Musk’s idea for a buyout backed by Saudi Arabia’s sovereign wealth fund now off the table, attention is zeroing in on Tesla’s efforts to become profitable, its cash reserves and what steps Musk could take to raise fresh capital.
Tesla had $2.78bn in cash at the end of the second quarter, when it reported a record $718m loss.
In early August, before the buyout plan was made public, Tesla reiterated a forecast that it would achieve profit in the third and fourth quarters, under normal accounting rules, and Musk said the company would not need to raise more cash.
A Tesla spokesperson on Sunday referred to those previous comments.
"With its long-term mission intact but short-term growth shaky, serious gaps in execution skills and a board under pressure for not assuming its duties, now may be the time for third parties to get involved, be it from technology or even oil," Jefferies analyst Philippe Houchois told clients.
One of Tesla’s biggest challenges is ramping up production of the Model 3, which is critical to its profitability goals.
Tesla’s shares are still 27% above a low of $244.59 hit on April 2, a day before the electric carmaker released its production and Model 3 deliveries report for the first quarter.
Investors in Tesla’s bonds and convertible debt had already shown scepticism that the tens of billions of dollars needed for the buyout would materialise, unconvinced by Musk’s tweet or subsequent blog post in which he could only make the case for going private and did not list clear backing.
Analysts have suggested a capital raise may be required soon to boost investor confidence, but investment bankers who are not working for the company said at the weekend that such a move would contradict Musk’s promise that Tesla is adequately funded.
This week is an inopportune time for a capital raising, given that many bankers and investors are away ahead of the September 3 Labor Day holiday.
"We see the company raising $2bn [in the fourth quarter] through convertible debt, which may prove a challenge if there still is an ongoing [Securities and Exchange Commission] case open," Cowen and Co analyst Jeffrey Osborne wrote in a client note.