Coyote Blog

Today, following his usual practice of ignoring all the securities laws that other CEO's have legions of lawyers to educate them on, Musk teased a possible Tesla LBO in a series of tweets.  In case you are wondering, it is not generally considered best practice in legal compliance to issue such information in cryptic tweets, and it is definitely not usual to do so while the stock is actively trading.  You can read the whole story here, though it continues to evolve as the market has finally halted trading in Tesla.

Here is the part I found funny watching this in real time:

Mr. Musk’s account tweeted at 12:48 p.m. ET: “Am considering taking Tesla private at $420. Funding secured.” It isn’t clear what prompted the tweet. Mr. Musk has a history of joking on Twitter and sending erratic tweets.

About 30 minutes later, the account tweeted “420” in response to a reporter’s tweet asking what price buyers might pay.

When this came out, I honestly thought "420" was an admission by Musk of a drug-induced mental state when the previous tweet went out, but in fact it appears to be his target price for the LBO.  Some quick thoughts

• This would fit Musk's personality, as he seems unable to ignore those shorting Tesla stock and would get the twin satisfactions in such a deal of a) burning a lot of current shorts and b) making shorts irrelevant in the future as going private ends the active market for the company.
• The implied valuation would be insane, something like $75 billion in equity (compared to GM and Ford which are both around $50 billion) plus $9 billion or so of assumed debt.  Tesla is already at the breaking point on debt so it is unclear where the funding would come from -- LBO's generally increase leverage and Tesla needs to decrease it, and needs a lot more capital for operations and growth going forward.  But Musk claims he has the deal funded already.
• Part of the clue to the capital availability may be the Saudis.  It was revealed today that the Saudi's own just under 5% of Tesla' stock.
• Here is what I think Musk wants -- he wants an LBO without any actual change in ownership.  Basically he wants to create Tesla New, which will be private and not trade on the markets.  He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New.  Musk has already said he will do this with his 20%.  In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO.  Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity.

This is great for those who want out, but for those who are in for the long haul, it seems like a lot of capital just to remove short sellers from the picture.  This is a company that does not have anywhere near enough capital to do the things it has already promised to do (China plant, model 3 ramp, $35,000 model 3 car, semi, pickup truck, two-seater, battery storage projects, revive SolarCity, etc.).  For those who think that the capital will always be there for Musk, just remember SolarCity, which was close to bankruptcy and in steep decline when Musk engineered the insider deal with Tesla.

Update:  This statement from a Morningstar analyst makes no sense to me:

Taking it private would allow the billionaire “to not constantly worry about going to the public markets for more money,” Mr. Whiston said. “He can do what he needs to do behind closed doors and keep growing the company without all that extra scrutiny.”

I get the second part -- Musk would love to avoid the extra scrutiny -- Theranos probably survived years longer as a private company than it ever would have as a public company.  But I don't understand how it stops the need to go to the public markets for more money.  Cash needs are driven by Tesla growth plans and they still need a LOT more.  Going private does not make this easier, it makes it harder by cutting off one huge source of capital (public markets) and potentially loading up the company with extra debt from the privatization transaction.

This is one of the more remarkable pieces I have read in a long time.  Shenzhen Tech Girl Naomi Wu describes how Sarah Jeong and Vice magazine refused to acknowledge that maybe a woman in China is in a different situation than a woman in Brooklyn and outed her for a few clicks.  An excerpt:

These are not games you play in China, it doesn’t matter if the sum total of their experience living a warm sheltered life in America makes them think it will probably be ok. Things are not the same here. That is not how agreements with sources works, Vice wasn’t in a position to understand the exact nature of the risk I face or what limits have to operate within- and didn’t care to find out. It doesn’t matter if the story “reads positive” or “seems fine” to an American reader- they are not who I have to be concerned with....

It’s not that a White American can’t understand China- that is nonsense, there are countless American journalists and scholars here that are experts in this field that Jason Koebler or Vice could have contacted to verify what I was telling them, I begged them to. They simply didn’t care....

Then Sarah drops a veritable atom bomb of an Appeal to Authority, she is Korean (having lived a full week as an adult in Korea). South Korea is pretty much the same as Mainland China, therefore I was never in any danger. She invokes the monolithic Asian culture myth precisely because she knows her largely White audience believes this anyway.

You can get your full daily RDA of irony by reading it all.

I was reading the Tesla shareholder letter and I found this funny.  Tesla began by celebrating that it produced 5,000 Model 3 cars  in the last week of Q2.  And also

Highlights from the company’s letter to shareholders included the promise to produce 6,000 Model 3 sedans a week by late August, and to produce 50,000 to 55,000 of the sedans in the third quarter.

So we began the quarter at 5,000 per week and will hit 6,000 a week about two thirds of the way in so that we will on average produce around 4,000 a week for the quarter.  Right.

It is useful to have an algorithm for spending your travel (hotel, air) loyalty points.  Years ago I generally saved them for big vacation trips, usually to Europe or Hawaii.  These were the most expensive trips I took and it felt good to bring their cost down.

Two things have killed this algorithm for me.  One is that most major airlines don't have squat for points availability on popular Trans-Atlantic and Hawaiian routes (British Airways, I am looking at you).  The second change was that I started to read some of the web sites focused on travel points, for example the Points Guy.

There is good information on these sites, but a lot of the detailed strategies are way to arcane and time-consuming to bother with (e.g. Take your American Express points and convert them into gift certificates denominated in Ecuadorian currency, and then apply these for double credit... etc).  But the one takeaway I have had is to think of your points like a currency with a constantly varying exchange rate to dollars, and find the opportunities to spend the points at the best exchange rates.  TPG  maintains a monthly estimate of the value of each type of reward point.  Expected value is between 1 and 2 cents a point for most.

My new algorithm is to use my points when I am getting at least 2 cents for them, and hopefully more.   Take hotel points for example.  From time to time I will find that there is some squeeze in hotel rooms in a city I want to visit and the price of most hotels have risen 50-100% for these days.  This is a great time to use your points, particularly if you are locked into the dates and can't go on a cheaper date.  The reason for this is while the price in $ goes up, the price in points does not.  There may be some hotel chains that limit availability, but Starwood for example does not.  Let me give an example.

In several weeks I am taking my wife for a nice weekend to see her friends in Manhattan.  We are locked into the dates.  But it turns out that there is some UN event and all the hotel rates have skyrocketed even higher than usual NYC hotel rates.  It was just going to be too expensive to stay in a really special hotel.  Until I thought of the St. Regis.  It is not my first choice, but it is in Starwood and with the Starwood Amex card I have a zillion points.  Turns out for a basic room the nightly rate had gone all the way to $1500 (welcome to NY).  But the points cost for the same room was the same as it ever was, 35,000.  I was effectively getting 4.3 cents each for my points.  One could argue that since this was not my first choice, I should compare it to that alternative, but even with a cheaper rate at that hotel this was still 2.6 cents of savings for each point.

For American Airlines, I try to do the same thing.  Most transcontinental flights have no points availability, or have availability at really bad exchange rates (The one exception I have found is Cathay Pacific, which takes American points and tends to have a lot of award seats).  I increasingly use my points domestically.  When rates shoot up for a particular flight, there still may not be availability but sometimes the opportunities are there.

The last few days I have written of my frustration at trying to get local business bank accounts, the sole purpose of which is to accept deposits of cash from my local campgrounds and then transfer that money to my main account.  This is a major hassle as opening a bank account as a corporation is not a simple task and, as I have found out, some banks won't even accept this sort of business.

Here is what I need:  I need a national network of offices, many in rural locations, that will take my cash and ACH (a cheap form of wire transfer) the money to my bank account.  So naturally, I think of Walmart.  Walmart already is used to handling a lot of cash and Walmart is already starting to offer a number of consumer banking services.  One reader told me about the Bluebird service, a joint effort between Amex and Walmart to create a sort of virtual consumer bank.  I love the idea, but it has rules limiting it to consumer accounts.

So here is my business for you Walmart

• I bring my cash to you at any store.  You zip it through a counter.  We agree on the amount.
• You wire my main account with the money.  I will give you three days so you can use the cheapest transfer and have time to get the cash into your own account.
• I will pay you 100 bp (1%) of the cash value for the service

Currently I pay merchant processors 270-300bp for those transactions and I have to wait 3-5 days for the money to hit my accounts.  So 100bp on cash would be fair for me, and I would guess fair for Walmart.