Tesla Shareholders Could Be Getting A Good Deal If It Goes Private

Tesla (NYSE:TSLA) CEO Elon Musk surprised investors on Tuesday by tweeting that he was considering taking the company private at $420 per share, noting that he had already secured funding for a potential deal. A buyout, which could be the largest in history, is likely to help Tesla execute on its long-term mission of accelerating global adoption of sustainable energy, without having to worry about stock market scrutiny and quarterly earnings. While Tesla indicated that a deal would need to be finalized via a shareholder vote, it hasn’t provided any specific details regarding the structure of the deal, its potential backers or a definitive timeline.

View our interactive dashboard analysis on what to expect from Tesla in 2018. You can modify any of our forecasts or key drivers to see how changes would impact the company’s projected results or valuation.

What Will It Take For Tesla To Go Private?

While such deals typically happen via leveraged transactions in which companies are bought out by taking on a sizable amount of debt, we think it is unlikely that Tesla will take this route, as it remains cash flow negative and only expects to turn profitable during the second half of this year. Tesla’s bonds are also rated junk by credit rating agencies, so taking on significant debt may not be an option. At an offer price of $420 per share, this would translate into a valuation of about $72 billion for the company. However, the final number is likely to be smaller as Elon Musk owns around 20% of Tesla stock, and the company also has other strategic investors such as Tencent (5% stake) who may want to keep their holdings. Moreover, Tesla indicated in an email to employees that existing investors can still opt to remain investors in a private Tesla if they don’t want to sell their shares.

Shareholders Would Be Getting A Good Deal

We believe that an offer of $420 per share, which implies a premium of around 20% over the company’s stock price following its Q2 earnings, is attractive for shareholders. We currently estimate Tesla’s fundamental value at well below that, based on our discounted cash flow model, and we remain skeptical as to whether the company will maintain a long-term competitive advantage as mainstream automakers go all-in on electric (see Why we believe Tesla doesn’t have a strong economic moat). For instance, Jaguar recently unveiled its new I-Pace electric SUV, which has garnered overwhelmingly positive reviews, while other automakers such as GM and Nissan have also been producing relatively compelling electric products such as the Bolt and Leaf, indicating that the broader auto industry is getting the electric formula right. We believe that Tesla’s key differentiators such as lower battery costs and self-driving technology could be undermined as larger companies scale up their EV plans.