Elon Musk, founder, CEO and lead designer at SpaceX and co-founder of Tesla, speaks at the International Space Station Research and Development Conference in Washington on July 19 2017. Picture: REUTERS
Elon Musk, founder, CEO and lead designer at SpaceX and co-founder of Tesla, speaks at the International Space Station Research and Development Conference in Washington on July 19 2017. Picture: REUTERS

San Francisco — Elon Musk revealed that Saudi Arabia has long been interested in taking Tesla private, which gave the him the confidence last week to drop the bombshell that he was considering the blockbuster potential deal.

Saudi Arabia’s sovereign wealth fund first approached Musk in early 2017 about taking Tesla off the market, he wrote in a blog post on Monday. He confirmed the Public Investment Fund recently bought an almost 5% stake and is interested in helping take Tesla private.

Musk described a meeting late last month in which a managing director for the fund expressed regret that such a transaction had not moved forward. "I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving," Musk wrote, adding that this is why he tweeted on Tuesday that he had "funding secured" to take Tesla private at $420 a share.

The blog post is the latest in what has been a piecemeal approach by Musk, 47, to explaining how he intends to pull off taking his money-losing electric-car maker private at a more than $70bn market capitalisation.

The billionaire chairman and CEO made no public mention of the Saudi fund’s involvement until on Monday. Tesla’s board released a three-sentence-long statement last week that only vaguely addressed how the transaction would be funded and did not bring up the kingdom’s potential role.

Legal scrutiny

Several investors have since sued Musk and Tesla, claiming the company’s share price was manipulated. The Securities and Exchange Commission is said to be intensifying its scrutiny of the company and its chief executive officer after having started gathering general information about Tesla and Musk’s earlier public pronouncements about manufacturing goals and sales targets.

One of Tesla’s biggest critics, Vertical Group analyst Gordon Johnson, read Musk’s blog post as walking back his "funding secured" claim last week. Johnson cited Musk’s statement on Monday that the Saudi fund’s support for taking Tesla private was "subject to financial and other due diligence and their internal review process for obtaining approvals".

"He is specifically stating that funding is not secured, and I think that’s a big deal," Johnson, whose $93 price target for Tesla’s stock is the lowest among Wall Street analysts, said on Bloomberg Television. "The question then becomes, what does the SEC do here, and do the shareholders stick with him?"

Question answered

Tesla bull Gene Munster of Loup Ventures said the blog post "slightly increases" the odds that the company will be taken private. He cited Musk’s commentary and Bloomberg’s report on how the Saudi fund was interested in getting involved as part of the kingdom’s efforts to hedge against the world becoming less reliant on oil.

"The question, ‘Where would the money come from?’ has been answered," said Munster.

He estimates a greater than 50% likelihood that Tesla will be private in a year, with Musk trying to limit investors like the Saudi fund to holding a stake of 20% or less, which would be in line with his holding in the company.

Tesla shares rose 0.7% to $358.03 at 2.10pm on Monday in New York trading.

Best guesses

Musk wrote that he would continued to communicate with the Saudi fund managing director, whom he did not identify by name. He said he has reaching out to Tesla’s other large shareholders and that most of the capital required to take the company private will be funded by equity, rather than debt.

"The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private," he wrote, meaning that the actual capital needed to be raised would be "dramatically" less than $70bn.

Musk said that his "best estimate right now" is that roughly two-thirds of the shares that Tesla’s current investors own would stick with a private Tesla.

After building that syndicate, Munster of Loup Ventures said that Tesla will need to create a vehicle for investors to "roll their public investment into a private one", then obtain regulatory and shareholder approvals.

"Our best guess is this will take three to nine months," Munster said.