A Musk-Less Tesla May Find It Hard to Raise Capital, Street Says

(Bloomberg) -- The SEC suit against Tesla CEO Elon Musk is likely to bring a host of challenges to the already embattled automaker, analysts say, casting doubt on the founder’s future with the company and its ability to raise funds.

It’s too early to say if Musk will be able to stay at the company, and in what capacity, analysts said, although the suit gives the board an opportunity to reassess the management structure. The news drew at least one downgrade, with Citi pushing the stock to a sell and saying the suit may send investor confidence spiraling downward. Other analysts said the lack of a settlement may suggest the lawsuit could overshadow the company’s improving production trajectory into next year.

The SEC action comes days before Tesla is expected to announce its third-quarter delivery figures. It typically reports the closely watched numbers shortly after the quarter’s end.

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Tesla Inc. plummeted as much as 13 percent to $268.10 in New York, its biggest intraday decline since August 2015. The shares were trading down 12 percent at 1 p.m. on Friday.

Bank of America Merrill Lynch, John Murphy

• “The most notable element of the SEC’s filed charges against Mr Musk, and severity of relief sought by the regulators, is the effort to bar him from serving as an officer or director of a public company (Tesla included), as a result of his alleged violation of securities laws.”
• “Tesla’s stock has often been disconnected from its fundamentals, instead following Mr Musk’s ambitious vision. In the event the court determines he be removed from the company, we think investors would be unlikely to take on the vision of another CEO, and rather focus on fundamentals, which we think would be a major risk to the stock.”
• “We view the current SEC charges as added risk to an already fragile situation, and continue to be concerned about the longer-term profitability, cash flow, and valuation of Tesla.”
• BofAML rates Tesla underperform, price target $200.

Bernstein, Toni Sacconaghi

• “Ironically, the SEC brought suit against Musk personally to avoid damages having to be paid by Tesla shareholders, but the announcement wiped out over $6 billion in market cap in yesterday’s aftermarket.”
• “In essence, Musk’s hand is being strongly pushed to come to the negotiating table – if he doesn’t settle, it could materially impede his growth plans and create an ongoing discount in the share price.”
• “An outright ban of being an officer or director is likely non-negotiable for Musk, but a ban prohibiting from him being CEO or CFO (and tweeting?) could be a possibility – and ultimately might be welcomed by investors.”
• Bernstein rates the shares market-perform, price target $325.

Oppenheimer, Colin Rusch

• “We believe lawyers have been engaged since the early days following the go-private tweet and that Musk will be looking for a speedy settlement.”
• “Next week, we will see production and delivery numbers which should provide insight into cash needs for the company. We expect strong deliveries which could help support shares, noting legal worries likely cap stock movement.”
• Oppenheimer rates the stock outperform.

Barclays, Brian Johnson

• “Tesla shares have about $130 of Musk premium for future success that might dissipate.”
• “Should the SEC be successful in barring Mr. Musk from serving as an officer or director, investors would focus back on the value of Tesla as a niche automaker, rather than a founder-led likely disrupter of multiple industries.”
• “The SEC likely need only prove reckless behavior to make a civil charge stick.”
• Barclays rates Tesla underweight, price target $210.

UBS, Colin Langan

• “Regardless of the outcome of the lawsuit, we continue to estimate Tesla will need to raise capital in 2019.”
• “Historically, Tesla has had easy access to capital markets, largely due to the public’s perception of Musk as a visionary. Without Musk, investors may no longer be willing to continue funding a company that has never reported an annual profit.”
• “While the outcome of the case is uncertain, if the SEC prevails Tesla may have to find a new CEO. A new CEO would have to deal with manufacturing issues, liquidity concerns, and a marginally profitable flagship product.”

JPMorgan, Ryan Brinkman

• “We are concerned that decreased confidence in Tesla on the part of investors may impact the company’s ability to raise capital on amenable terms.”
• “Nearer term, we believe a capital raise may be needed to preserve liquidity in the event the company does not reach its targeted milestones in second-half of 2018 for Model 3 production, GAAP profitability, and positive cash flow.”
• Removing Musk from the company “could hasten the inevitable transition of Tesla shares toward being valued based upon fundamentals alone.”
• JPMorgan rates Tesla underweight, price target $195.

Consumer Edge, James Albertine

• “We believe the board of directors must assert its independence in order to protect long-term value at Tesla and to demonstrate to shareholders and potential CEO, co-CEO and/or COO candidates that it will not tolerate unforced errors like these in the future.”
• “There is no doubt Musk is a prodigy when it comes to converting vision into reality, but we believe there are CEOs or COOs available better suited to managing large, public companies at this stage.”
• Consumer Edge rates the stock an equalweight, price target cut to $285 from $300.

Morgan Stanley, Adam Jonas

• Jonas, who retains an equal weight rating on the stock, says “now is the opportunity for the board to assert itself into the strategic and organizational narrative in a more transparent way.”
• “We see the potential for negative sentiment to impact demand and employee morale. This is particularly a risk if the situation is not resolved relatively quickly.”
• “Tesla still has significant strategic value in an important technological domain, but this could atrophy with a prolonged and/or adverse legal process.”
• “The outcome risk is far less about money and much more about Elon Musk’s future with the company.”

RBC, Joseph Spak

• Access to capital has always been a key part of the Tesla story, and “having Elon Musk as CEO has undoubtedly made that easier in the past.”
• The company’s cash level (or stock price) needs to improve to be able to handle the $920 million convertible bonds due in February 2019 (conversion price is ~$360)
• “With the news, investors may begin to think about Tesla’s bench in the event Musk is no longer able to serve as an officer,” Spak wrote in a note, adding that most investors RBC spoke to in the past about such a scenario suggested CTO JB Straubel. “This thought experiment also reinforces our view that a COO or other executives, preferably some with strong manufacturing and execution experience, is needed.”
• RBC rates Tesla sector perform

For more on Tesla’s recent issues, check out the Decrypted podcast:

Loup Ventures, Gene Munster

• “Consensus appears to be that Elon will be removed as CEO and chairman and may be removed from the company entirely. We think this is an overreaction and believe there is a 50-50 chance Musk remains CEO after this SEC matter is resolved and an even greater chance he remains involved somehow with Tesla in any case.”
  • “If the SEC is granted its request to remove Musk, there’s a question as to whether they’re doing more to harm continuing shareholders or protecting them, at least in the eyes of the market.”
• Munster sees the complaint taking 6-12 months to resolve without a settlement, and could include a substantial financial penalty for Musk and may open him to further legal action from investors
• Still believes Tesla will survive; “given comments from Musk on September 7th related to production, we believe the trajectory of the business is improving at a level that can support servicing its upcoming debt obligations and eventually generate cash”

Cowen, Jeffrey Osborne

• The ball is in the board’s court, although it’s unclear how quickly it could bring in a seasoned auto executive even if it wanted to, considering Tesla’s financial condition, production problems and logistics and delivery problems
• The timing is challenging, given the quarter-end and delivery logistics and the company’s ongoing cash burn
  • Believes Tesla needs to raise $2 billion in the fourth quarter to remain a going concern in spring of 2019
• Distraction of Musk’s legal problems may affect 4Q performance, which was expected to be cash-flow positive and GAAP profitable
• Cowen rates Tesla underperform with a $200 price target

Canaccord, Jed Dorsheimer

• Tesla may see higher borrowing costs and its stock will be under pressure as funds limit holdings because of an active SEC lawsuit against Musk
• SEC complaint will raise the cost of capital to fund two upcoming tranches of debt, which include $230 million in November and $920 million in March 2019
• A complete removal of Musk from the company also poses risk to the shares; his talent can be used in different capacity than chairman and CEO
• Canaccord rates Tesla a hold, price target $316

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Scott Schnipper

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