Musk's Saudi Gambit Invites the Kind of Leverage He Doesn't Want
(Bloomberg) -- Elon Musk has painted an idyllic picture of a private Tesla Inc. operating away from investor scrutiny and short-seller attacks. But in casting Saudi Arabia’s sovereign wealth fund as a key player to allow him freer rein, he’s given them leverage to exert significant influence.
The Tesla chief executive officer has said the Saudi Public Investment Fund’s interest alone justified his claim last week that he had the funding secured to buy out some investors. The outsize role Musk described the fund playing in going public with his proposal could even give the Saudi fund a stake on par with his.
The Saudi PIF is unlikely to operate like famous activists Carl Icahn or Bill Ackman, who’ve built their reputations by taking on boards and management, but they do have an agenda to bring more technology to the kingdom. Acquiring a big stake may embolden the fund to urge Musk to share solar or battery tech and even rein in Musk’s boisterous public persona.
“If the PIF increases their stake, they will probably have a lot of say in how the company is run,” said Michael Maduell, president of the Sovereign Wealth Fund Institute. “Their vision is to create job opportunities in the kingdom. I wouldn’t be surprised that they would want a gigafactory built in the kingdom.”
Representatives for the PIF didn’t immediately respond to a request for comment.
It also would mean having to come up with alternative sources of funding to help buy out those investors who would rather take the $420 a share that the CEO has promised them than have their holdings rolled over into an illiquid stock in a less-transparent company.
Musk, 47, has bristled at having to answer to Wall Street analysts on a quarterly basis and at dealing with investors who’ve built up immense short-sale positions against Tesla, betting the stock will drop.
A major Saudi fund stake would likely mean Musk would have to please masters of a different sort. Saudi Arabia has been arranging big investments by high-profile American companies including Lockheed Martin Corp, General Electric Co. and Raytheon as part of roughly $400 billion in deals signed between the two countries.
GE has $15 billion in projects and joint ventures planned in Saudi Arabia to create technology centers and jobs in oil and gas, mining, manufacturing and health care. The company just started producing gas turbine engines in the kingdom last year and plans to double its employee count there to 4,000 by 2020.
The PIF also invested $3.5 billion in Uber Technologies Inc. in 2016. Since then, the ride-hailing giant has opened a “female partner support center” to help women learn to drive and work for the ride-hailing app.
The Saudi fund already has close to a 5 percent holding in Tesla. Musk wrote in a blog post that their interest in taking the company private dates back to early 2017. A spokesman declined to comment beyond the post, in which Musk said that he would like for Tesla to “continue to have a broad investor base.”
Gene Munster, a managing partner at venture capital firm Loup Ventures, believes Musk would prefer to limit investors to the roughly 20 percent equity stake that he owns as the company’s largest shareholder.
But the CEO may accept being surpassed if he’s unable to secure a big enough syndicate to complete the transaction, Munster wrote in a report this week. The Tesla bull estimates a greater than 50 percent likelihood that the company is private in less than a year.
Barclays analyst Brian Johnson isn’t so sure. He acknowledges that oil-rich sovereign wealth funds including those for Saudi Arabia and Norway have plenty of cash to contribute as a hedge against the commodity Musk is trying to wean the world from. But they have plenty other investments to choose from, including Chinese electric vehicle manufacturers, battery technology and raw materials such as lithium and cobalt.
“As glamorous as Tesla seems to be as a holding, we’re not sure if it’s the best much less the only way to diversify away from oil,” Johnson wrote in a report Tuesday. The analyst, who rates Tesla the equivalent of sell with a $210 price target, said sovereign wealth funds will have to consider the likelihood that Musk will need additional funding to keep expanding the company. Plus, their positions will be less liquid if the carmaker is taken private.
As state-run oil giant Saudi Aramco set its sights on going public, the government touted plans to make PIF the world’s largest sovereign-wealth fund, controlling $2 trillion. But Aramco’s initial public offering has run into snags, and the company signaled another potential delay by starting talks last month to buy a stake in a local petrochemical company.
The good news for Musk and Tesla is that the PIF isn’t just interested in quick returns.
“If you have public scrutiny and all of the short-term pressures that come with it and wanted to swap that out, partnering with someone who has a long-term investment focus might not be a bad trade,” said Patrick Schena, a professor at Tufts University’s Fletcher School who studies sovereign wealth funds.
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