Tesla's Hail Mary Play and Convertible Bond Hokey Pokey

Elon Musk's Tweet about going private was likely an act of desperation. Tesla will not meet stated profitability goals.

It's looking increasingly likely that Musk's August 7 Tweet about taking the company private was a purposeful distraction as well as a violation of security laws. Here is the Tweet once again.

I commented on that Tweet in Private Lies: Musk Tweets He Will Take Tesla Private.

I never believed Musk secured funding, and that belief has now been proven true.

So what is that Tweet really about?

CoverDrive did an exception post on one aspect and I have a follow-up idea to consider.

For Tesla, Time Has Come Today

Please consider For Tesla, Time Has Come Today by CoverDrive.

At Tesla's (TSLA) earnings conference call on August 1st, everything seemed to be under control. The call began with a lengthy discussion of 10x faster tensor processing, followed by a brief apology for terse behavior at the Q1 conference call. Honestly, everyone just seemed to be relieved that Elon avoided another CC meltdown.

With everything going so well at the conference call, what led to this surreal state of affairs launched by Musk's tweets last Tuesday? Let me begin by saying that if Tesla could deliver a profitable third quarter, all of these shenanigans would be unnecessary. One can only conclude that the profit narrative was evaporating.

Musk needed something even bigger to take its place. And what could be bigger than proposing to take the company private?

The Hail Mary is Launched

Let's take a closer look at why the change in narrative was necessary. Back in 2017, the narrative was purely one of growth. In fact, Musk stated he has "Zero Doubt" About 10,000 Units Per Week in 2018.

But in the ensuing 12 months, Tesla found themselves deep in the throes of "Manufacturing Hell". It became clear that the visionary production level would never be achieved within the walls of Fremont. As a result, capital expenditures were scaled back dramatically and the narrative was changed to "profitability at 5,000 per week".

Continued profitability is a really big deal, especially considering that additional capacity will not be available until the Shanghai Gigafactory is built. The profitability claim is coming from a company that has posted a $2.8B loss in the last 12 months. How is the turnaround possible? Has production hell been reduced to purgatory?

Tesla Profitability

CoverDrive explains his calculations in detail starting with an assessment of last quarter's key numbers then applying reasonable assumptions from Tesla's guidance.

His conclusion is identical to mine.

Conclusion

Musk's tweet resulted from the need to change the narrative from profitability in Q3 to taking the company private. With the clock ticking, the Saudi investment announcement provided the perfect opportunity to leapfrog on the momentum. Unfortunately, there was no time to confer with the board of directors, and the tweets went out without the benefit of corporate scrutiny. Musk has placed his company in a perilous position.

At the time of this writing, an 8-K describing the details of the go-private proposal has yet to be filed. No source of secured funding has been identified. If the secured funding source is not identified, it would appear that Musk's tweets on Tuesday were an overt attempt to manipulate the share price. On that matter, I'll leave it for the experts to decide.

Convertible Bond Hokey Pokey

There is one piece of the puzzle that CoverDrive missed.

Please consider Tesla Stock’s Surge Puts Convertible Bonds in the Money.

The surge in Tesla's (TSLA) shares after CEO Elon Musk's tweet about going private has had huge, salutary effect on its key convertible bonds and its financing position. By pushing the common stock's price above the $360 level, his tweet has put a $900 million convert issue above its conversion price, which would effectively let the electric-auto maker pay off that obligation in stock instead of cash.

Tesla has a $920 million 0.25% convertible issue due Feb. 27, 2019, which would be convertible into common at a price of $359.8676 per share. If the stock trades below that price at the conversion price, the holder would be better off taking cash. That would put pressure on Tesla while it continues to burn cash, as of the second quarter. But by being able to redeem the debt in stock would obviate the obligation to come up with over $900 million in cash.

In addition, Tesla also has another 1.25% convertible totaling $1.38 billion that matures Feb. 25, 2021. This issue also converts at the same price, and a common share price over $360 also would obviate the need to pay off this convert in cash.

Ding, Ding, Ding

Ding, ding, ding, we have a winner. Musk is desperate to get Tesla's share price above $360 to avoid having to shell out $900 million that Tesla clearly does not have.

Tesla Share Price Hokey Pokey Musical Tribute

Question of the Day

And you do the Hokey Pokey and you turn yourself around. That's what it's all about.

Mike "Mish" Shedlock

Comments (7)
No. 1-6
Tengen
Tengen

Any predictions on how wagner/gliderdude will take this? I just heard the PA system summon him to the white courtesy phone.

thimk
thimk

got a good chuckle, true mish style

DFWRealEstate
DFWRealEstate

Occam's Razor

ML1
ML1

I proposed the theory in Mish blog comments that Musk's tweet was about convertible bonds and that Tesla stocks needs to be above a certain level so Musk does not have to pay in dollars but owners of the bonds take stock instead.

KidHorn
KidHorn

After what I've read about quality control, it wouldn't shock me if the NTSB stopped production so they can check out the production process. That would doom Tesla.

Can Tesla pay the difference of a convertible debt? What if say it's trading at $350, can the debt convert to common and Tesla throw in $10 of extra equity or cash?

oudaveguy98
oudaveguy98

Tucker. DeLorean. Tesla.