Why Elon Musk's plan to take Tesla private is likely to fail

The melodrama surrounding Tesla and embattled CEO Elon Musk continues to deepen. 

The electric car maker's stock fell another 9 percent on Friday following the release of his emotional interview with the New York Times. This followed whistleblower claims on Thursday alleging that some workers at Tesla's "Gigafactory" were involved with a Mexican drug cartel.

The Securities and Exchange Commission has reportedly served Tesla with a subpoena to seek information from the company's directors. So what lies ahead for Tesla?

It seems Musk, who suggested that funding had been "secured" for the take-private deal, has pinned his hopes on informal assurances from Saudi Arabia's sovereign wealth fund that it was looking to raise its stake in Tesla.

Musk also believes that the total deal would be less than the current $70 billion price tag being floate since he believes many existing shareholders would exchange their stock for shares in the new private Tesla. 

But there are a number of problems here. For one, Musk's saying that funding had been secured suggests the deal was done, when in fact he is only now retaining legal and dealmaking advisers. 

Second, the $420 a share value looks wildly optimistic and is likely to be lowered. Third, the SEC is likely to view Musk's shenanigans poorly, especially with a number of short-sellers already filing lawsuits against Tesla. 

Most important, it's unclear how Musk and the Saudis would structure a deal that allows ordinary Tesla investors to stay onboard. Only "accredited" investors with investable assets of $1 million or more are allowed to invest in private companies. One thought is that Musk, other big shareholders, and the Saudis would invest directly in the new privately-owned Tesla. 

But that a newly formed "special purpose vehicle" would be created to hold the minority stake in private Tesla for everyone else, with this entity then being listed on the public exchanges. Fillings would still need to be made, preventing Musk from escaping the quarter-to-quarter profitability and production deadlines he is trying to escape. 

It's worth remembering that without the Saudis, a deal probably doesn't get done. And that last week there were reports the Saudis weren't interested in underwriting a go-private deal. Which puts Musk in an awkward position, legally. 

Thus, the impression from Musk's tortured blog post explaining the situation is that he clearly jumped the gun on the announcement and is trying to explain away why so many critical details are in limbo. 

The simplest answer: He was overeager to deal out pain to the short sellers critical of his company. Many investors caught out by the chaos have now filed lawsuits. 

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.