Investors query funding costs at a private Tesla

NEW YORK/BOSTON: Several Tesla Inc shareholders have told Reuters they are concerned that the electric car maker will have to pay more to fund its growth if it becomes a private company and loses the ability to sell new shares to stock market investors.

The issue has come to the fore as a special Tesla board committee considers Chief Executive Elon Musk's idea of taking the loss-making company private in a deal that could be worth as much as $72 billion.

Tesla, whose bonds are rated "junk" by credit rating agencies due to its $11 billion debt pile and its negative cash flow, has tapped the stock market six times in the last eight years through share sales, raising nearly $4.3 billion, according to data from Dealogic.

Without that ready access to capital, Tesla investors who would consider keeping their stake in a private Tesla - as Musk has suggested - wonder how Tesla would fund itself as a private company.

"It ultimately comes down to if you can afford to be private and if you can get funding, and what the cost of that funding is," said Craig Birk, chief investment officer for Personal Capital Advisors Corp, a Tesla shareholder which owned about 97,000 shares as of June 30.

Musk shocked investors last week with a tweet that he was considering taking Tesla private at a price of $420 a share and that funding was "secured."

He elaborated on Monday that he believed Saudi Arabia's PIF, a new shareholder in Tesla, could provide the necessary funding, although sources close to the sovereign wealth fund have played down that prospect.

The 47-year-old entrepreneur and engineer said this week he believes two-thirds of existing Tesla shareholders would roll over their holdings into a private company, rather than cash out, and that he was still talking with major shareholders and advisers before settling on a structure for a deal. It remains unclear how any deal would be financed.

LACK OF LIQUIDITY

Musk has cited his long-running vendetta with short-sellers, who are betting that Tesla's stock will go down, as well as Wall Street's short-term focus on quarterly earnings, as reasons to take the company private. The implications for the company's funding, however, show that exiting the stock market will likely come with costs for Tesla.

Musk said on Monday he did not want to saddle Tesla with more debt, meaning it would then have to rely on private fundraising rounds like Uber Technologies Inc and other venture-backed companies, likely incurring a much higher cost of capital.

Estimates on how expensive private equity fundraising is compared with secondary share sales in the stock market vary. Venky Ganesan, investing partner at Menlo Ventures, said in an interview that the cost of capital - the rate of return required by an investor to persuade them to make a given investment - averages 17 percent to 18 percent for private companies compared with 6 percent to 7 percent for public companies.

"The primary downside of going private is the higher cost of capital that investors demand for the lack of liquidity, being able to buy and sell at a fair price at short notice," Jacobs Thomas, professor of accounting and finance at Yale School of Management, wrote on the university's website earlier this month in a post on Tesla.

The issue of funding is not merely academic. Tesla burnt through $3.4 billion of cash last year and has said it expects to invest another $2.5 billion this year.

Musk has said repeatedly since April that Tesla has no need to raise new capital. But analysts expect Tesla will require billions of dollars more over the next several years to fund its expansion plans and to develop new electric premium vehicles to take on German rivals.

On top of that, the company's battery Gigafactory outside Reno, Nevada is still only partially complete, and Musk has said that an announcement about a European plant will likely come by the end of this year.

Another big-ticket item for Tesla is its recently announced China factory in Shanghai, although Musk has said funding for the roughly $2 billion cost would come from local debt.

NEW CARS IN DEVELOPMENT

Getting access to cheap capital is a constant challenge for automakers, which can spend $1 billion or more engineering a single new model and bringing it to mass production, only to have the vehicle flop because of a cyclical sales slump or a shift in market tastes.

Mainstream automakers have historically failed to earn their cost of capital of about 9 percent because investments in new models, new technology and production equipment do not generate sufficient profits, the late Fiat Chrysler Automobiles NV chief executive Sergio Marchionne said in an April 2015 investor presentation.

Three new vehicles are in development at Tesla, the Model Y compact SUV, a new $200,000 Roadster and an electric heavy-duty truck that Musk unveiled last November, with production start dates in 2019 and 2020.

Analysts say that a lot will depend on the forecasts that investors make on the company's profitability for the next few years. The quicker Tesla can turn a sizeable profit, the easier it will be able to fund itself.

"Tesla is clearly capital-intensive... but it's also a disruptor that's growing like crazy, perhaps making it more akin to high-growth tech companies," Bernstein analyst Toni Sacconaghi wrote in a research note on Thursday.