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Tesla Takeover Turns Tenuous Given Priciest Valuation: Real M&A

June 24, 2013

Tesla Pushes Electric Car Viability With Rapid-Charge Expansion

This week’s planned announcement follows a series of events in May that put the Palo Alto, California-based carmaker on the most secure financial footing since its founding a decade ago. Photographer: Patrick T. Fallon/Bloomberg

Tesla Motors Inc. (TSLA:US), a long-speculated takeover target, just removed a barrier to a deal by paying off a U.S. government loan. The problem for would-be suitors is it’s also become the world’s most expensive carmaker.

The loan had contained language limiting Tesla’s ability to sell itself. A purchase probably still isn’t imminent because Chief Executive Officer Elon Musk might not be willing to part with Tesla and a buyer would have to pay top dollar for a 10-year-old company that just reported its first quarterly profit (TSLA:US).

The Palo Alto, California-based manufacturer trades for 816 times estimated 2013 earnings, the highest among automakers valued at more than $5 billion, according to data compiled by Bloomberg. Should Tesla scale up vehicle sales, it may attract a wide range of buyers such as Google Inc. (GOOG:US), which has $52 billion in cash (GOOG:US) and has invested in car technology, according to Robert W. Baird & Co. It may also lure conventional automakers, said Steve Westly, an early investor in the $12 billion company.

“Tesla has developed an appealing and credible product with game-changing technology,” Jim Press, the former deputy CEO of Chrysler Group LLC, said in a telephone interview. “They need to prove their success is sustainable for the long term and that it is based on a solid financial foundation. If they do, they should be an appealing takeover target.”

Possible Outcome

Tesla’s 2010 initial public offering at $17 a share was the first IPO by an American car company since Ford Motor Co. in 1956. The stock surged (TSLA:US) 194 percent to $99.55 this year through last week, giving Tesla the third-biggest rally among U.S. stocks valued at more than $5 billion, data compiled by Bloomberg show. Today, the shares rose 2 percent to $101.49.

Musk, who is also Tesla’s chairman, owns (TSLA:US) a 24 percent stake. A sale of the company is “one of the possible outcomes, I suppose,” he said during an interview last month, while adding that a deal isn’t expected soon.

“I’ve said from the very beginning, from the creation of Tesla, that our goal is to create a compelling mass-market car,” Musk said. “I would not consider stepping away from Tesla until we’re there,” he added. “We’re several years away obviously.”

Shanna Hendriks, a Tesla spokeswoman, declined to give additional comment on June 21, and Musk didn’t reply to an e-mail sent at the end of last week.

Surging Sales

Through the end of 2012, Tesla delivered about 2,450 Roadsters, a $109,000 two-seat electric sports car. It also began shipping its second vehicle last year, the Model S sedan that costs at least $69,900, with a target of about 21,000 deliveries in 2013.

Company revenue (TSLA:US) totaled $413 million last year, and analysts see that rising to $3.2 billion in 2015, according to the average estimate (TSLA:US) compiled by Bloomberg. Tesla earned about $11 million in January through March, its first profitable (TSLA:US) quarter.

To boost the appeal of its vehicles, Tesla is expanding its network of fast-charging stations, which will permit car owners to drive between the east and west coasts of the U.S. Last week, Musk demonstrated a battery-swapping system for the Model S that’s faster than charging and ensures the car earns maximum zero-emission vehicle credits in California.

While most automakers larger than $5 billion trade at a discount to revenue, Tesla’s stock price is more than 6 times this year’s average sales estimate, data compiled by Bloomberg show. Its price-earnings (TSLA:US) ratio of 816 based on projected 2013 results is also the highest in the industry and compares with a median of about 11, the data show.

Not Easy

“It’s not the easiest company to acquire, given the current valuation,” Nancy Pfund, who helps oversee about $250 million as a San Francisco-based managing partner at DBL Investors, said in a phone interview. Her firm was an early investor in Tesla, and she drives a Model S.

An acquisition of Tesla “could be a possibility, but it’s also a strong possibility that they stay independent for the near future because they can,” Pfund said. Like Google and Apple Inc., “it is that kind of an iconic company and iconic stock in the making,” she said. “That makes the list of buyers a little more rarefied.”

For potential suitors, Tesla just removed one takeover obstacle by paying off the $452 million balance on a U.S. Energy Department loan granted in 2009.

Unlocking Value

Repayment “opens up more flexibility for the company,” Ben Kallo, a San Francisco-based analyst at Baird, said in a phone interview. “There’s still a lot of value in the company to unlock before they get to the point of selling, but I don’t rule out an acquisition of Tesla down the road.”

Google, with $52 billion of cash (TSLA:US) and equivalents, is a possible suitor given its interest in vehicle technology, Kallo said. Self-driving cars are among projects stemming from Google’s practice of letting employees develop ideas not tied to online search and digital advertising, its main businesses.

“Google seems outlandish at first glance,” he said. Nonetheless, Tesla would “fall into some of the initiatives Google has under way.”

Sameet Sinha, a San Francisco-based analyst at B. Riley & Co. who covers Google, said the company is probably more interested in partnering with Tesla and other carmakers.

“To reach worldwide ubiquity, Google needs to license its technology to every manufacturer that is out there,” Sinha said in a phone interview. “I can’t see them purely tying up with Tesla.”

Leslie Miller, a spokeswoman for Mountain View, California-based Google, declined to comment.

California’s Program

Tesla also may attract automotive companies that are in need of regulatory credits to meet California’s Zero-Emissions Vehicle program and tightening U.S. fuel-economy rules, said Westly, managing partner of Westly Group Inc. in Menlo Park, California, and the state’s former controller.

Daimler AG (DAI), based in Stuttgart, Germany, and Japan’s Toyota Motor Corp. (7203) are both investors (TSLA:US) in Tesla.

“The advantage that Tesla may offer, presuming they can keep their mojo going, so to speak, is that they will provide good vehicles that meet and exceed fuel-economy and emissions requirements,” Alan Baum, principal of Baum & Associates, which provides auto-industry analysis, said in a phone interview from West Bloomfield, Michigan. “That’s something that a lot of car companies would benefit from, particularly those that are moving more slowly on the fuel-economy or electric-vehicle side.”

Diverging Forecasts

Still, Tesla is probably too pricey for a carmaker to bid on now, Baum said. Analysts are even in disagreement over the company’s prospects. Their estimates (TSLA:US) for the price Tesla shares will reach within the next 12 months range from $35 to $118, data (TSLA:US) compiled by Bloomberg show.

On the other hand, investors are paring back bearish bets on the stock. The percentage of Tesla shares sold short dropped to a two-year low of 11 percent as of May 31, down from 25 percent in September, according to data (TSLA:US) compiled by Markit.

“As Tesla continues to differentiate themselves, their technology advantage becomes more apparent,” Baird’s Kallo said. For companies interested in electric vehicles, “instead of going out and trying to build this technology in-house, Tesla could become a takeout.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Jamie Butters at jbutters@bloomberg.net


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Companies Mentioned

  • TSLA
    (Tesla Motors Inc)
    • $263.82 USD
    • 2.44
    • 0.92%
  • GOOG
    (Google Inc)
    • $589.27 USD
    • 4.50
    • 0.76%
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