The Downfall Of Elon Musk

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It's been a weird week for Elon Musk. Yesterday, Musk found himself denying that he had ever met or communicated with the has-been hip-hop artist Azealia Banks, best known for her skittery 2011 debut single "212" and her homophobic outbursts on Delta flights and Twitter. Tesla Inc. TSLA stock continued its week-long descent.

How did we get here? Let's back up for a moment. Last week FreightWaves reported on the revelation of a significant Saudi Arabian Public Investment Fund stake in Tesla amounting to just under the 5 percent limit that would trigger an SEC filing. That news coincided with Musk's abrupt announcement that he was considering taking Tesla private at $420 a share and had "funding secured." Those two little words are causing Musk and Tesla board members a lot of grief, because the reaction from Wall Street's investment banks was swift: ‘we have no idea what Musk is talking about.'

Tesla's stock traded wildly on the tweet before it was ‘halted pending news.' Monday morning, Elon Musk tried to explain himself in a post on the Tesla website, confirming that yes, he had conversations with the Saudis about taking Tesla private, but also essentially admitting that no deal had been completed. Terms and percentages had not been laid out and the Tesla board was in the dark, prudently refusing to comment on a still-hypothetical deal. 

Musk was in deep trouble. Never mind the fact that Musk has given away all of his leverage in a would-be negotiation with the Saudis—by showing his hand early, Mush has made himself desperate, and a few noncommittal statements from the PIF could crater Tesla's price and get the Saudis control much more cheaply. If it turned out that the tens of billions of dollars necessary to take Tesla private were not actually secured, then his tweet last week would be seen for what it is: a transparent attempt to pump the price of TSLA by disseminating false information. But why would Musk want to artificially inflate the price of Tesla shares—that is, inflate it beyond what his starry-eyed fanboys have already bought in at? 

The first reason is obvious: Musk owns more than 20% of the company and when the stock moves up, his personal wealth increases. The second reason has to do with a slightly obscure $920M bond issuance from 2014, a convertible bond paying 0.25%. Tesla's convertible bond doesn't pay a high coupon, but on February 27, 2019, bondholders can exchange it for Tesla stock at $359.86 per share. If the stock is trading above that price, bondholders get Tesla shares at a discount and can immediately sell for a quick profit, but if the stock is trading below that price, the bondholders would be better off taking cash—cash that Tesla doesn't really have.

Musk already burned bridges with the public capital markets by disrespecting automotive analysts on his Q1 earnings call, and has repeatedly stated that Tesla will not have to issue debt or sell more equity to raise cash this year. Still, a negative free cash flow company like Tesla does not want to have to retire $920M in debt. This is really where the rubber hits the road for the Securities Exchange Commission's investigation of Musk's public pronouncements on Twitter Inc. TWTR and elsewhere: Musk has a huge motive to pump the price of Tesla stock above $360 by any means necessary to avoid burning nearly a billion dollars of cash taking debt off its books.

"TSLA has 920 million reasons to keep the stock over $360 on the maturity of that series, so it can convert bond holders to bag holders," said Daniel Pickett, CFA, FreightWaves' chief data scientist and former automotive bond trader. "I stress again that Tesla has done incredible things for the automotive industry and the planet, but equity and debt investors should be prepared to be martyrs for the cause."

Back to Azealia Banks. Banks was confirmed as being at one of Musk's Los Angeles properties over the weekend, hoping to collaborate on music with Grimes, the inked-up waif Musk has been dating this year. The collab never happened, because Grimes was busy doting on Musk, who, according to Banks, was stressed out and red-faced, pounding the phone trying to rustle up some investors for his scheme to take Tesla private. Apparently, Banks saw Musk and overheard him without actually ‘meeting' him, if we're to believe both Banks and Musk.

Late on Monday, Musk tweeted "I'm excited to work with Silver Lake and Goldman Sachs as financial advisors, plus Wachtell, Lipton, Rosen & Katz and Munger, Tolles & Olson as legal advisors, on the proposal to take Tesla private". But Reuters reported that the buyout firm Silver Lake "had not been hired as a financial adviser in an official capacity" and "is not currently discussing participating in the potential Tesla deal as an investor." When Bloomberg asked Goldman Sachs about working with Musk, they declined to comment. Meanwhile, a Tesla spokesman said Musk's mention of those law firms referred to his own advisers and attorneys. 

The SEC investigation and Musk's legal jeopardy may come down to an unhinged rapper's Twitter DMs about his desperate, last-minute attempt to raise money. In the increasingly bizarre world of Elon Musk, which recently featured a tweet accusing a British rescue diver of being a pedophile, this feels less alarming than it should. 

The current pickle Musk is in has two outcomes: either he has engaged in obvious stock manipulation to avoid retiring $920M in debt by knowingly disseminating false information, or the Saudis end up gaining control of Tesla with very favorable terms. Other institutional backers of Musk's enterprises are checking out: Fidelity, which in addition to being one of Tesla's largest shareholders also has a $436M stake in SpaceX, sold off about 20 percent of its TSLA shares yesterday. 

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Image courtesy of JD Lasic via Flickr

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