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Tesla shareholders face possible capital gains tax bill if company goes private

There's another reason Tesla's faithful investors might want to scrutinize CEO Elon Musk's public musings on taking the company private: Shareholders would likely face a tax bill.

Musk's surprise announcement last week — which is under review for possible violations of securities laws, according to various published reports — included his hope to let shareholders remain invested in a special fund if the company were to go private. He also said he would offer $420 per share.

Musk reiterated in a blog post on Monday that he would want current shareholders to remain invested if they choose to. He also said the $420 price he floated would be for those who don't want to stay.

Ray Tamarra | Getty Images

“My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla,” Musk wrote.

However, if that were done via a special fund as he initially said, shareholders likely would need to sell their Tesla shares and purchase fund shares.

“It would be like buying a mutual fund, only the fund only invests in one stock,” said Bill Smith, managing director at CBIZ MHM's National Tax Office in Washington.

And for investors with profits from the sale of their shares, those gains would be taxed regardless of what they do with the money.

Short-term gains — shares held less than a year — are taxed as ordinary income. Long-term gains are those for shares that were held longer than that, and the rate is either zero percent, 15 percent or 20 percent, depending on your overall income.

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Longtime Tesla shareholders could be on the hook for a big bill. In June 2010, Tesla went public with an opening share price of $19. Since then, its stock has climbed to $340 or so — and that's despite the company continuing to post losses. In 2017, Tesla had a reported a net loss of $2.24 billion, widening from $773 million in 2016.

Nevertheless, $10,000 invested in Tesla when it went public eight years ago would be worth close to $179,000 today. That gain of $169,000, taxed at the top rate of 20 percent, would generate a tax bill of $33,800. And depending on the investor's total adjusted income, an additional 3.8 percent tax could be due.

While there are company structures and accounting strategies that in theory can help shift shareholders from public to private without taking a tax hit, Tesla's size pretty much rules that out.

“For Tesla's size, it's highly unlikely,” said JR Lanis, a partner at the Los Angeles office of national law firm Drinker Biddle. “If we were talking about a much smaller company, maybe.”

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Beyond the tax implications of staying invested with Tesla through a fund, investors should be aware of other issues.

For starters, it's unclear exactly how a special fund could be structured in a way that would allow all shareholders to stay if they want, despite Musk's hope.

“It's hard to do these types of big-dollar transactions under the best of circumstances,” Lanis said. “If you bring in smaller investors, it's a coordination nightmare.”

Generally speaking, private companies are allowed to have up to 2,000 regular shareholders without triggering SEC reporting requirements. If a fund were created, it could be a way to sidestep the limit.

However, in that case, experts say the investors would need to be accredited — meaning they need to have at least $1 million in investable assets excluding the value of their home or average yearly earnings of $200,000 ($300,000 for married couples).

“It's hard to do these types of big-dollar transactions under the best of circumstances. If you bring in smaller investors, it's a coordination nightmare.”
-JR Lanis, Partner, Drinker Biddle

In other words, that would remove the option to remain invested for anyone who could not meet those minimum requirements.

“The profile of the typical Tesla investor is someone who is wealthy and a young tech investor, who may or may not be accredited,” said certified financial planner James Gambaccini, a managing partner at Acorn Financial Services in Reston, Virginia.

Even for those who could stick with the company, it would mean less flexibility in when you can buy or sell shares. Musk's email to employees said he envisioned allowing shareholders to buy or sell about every six months.

Additionally, there's a big difference between being invested in a public company — one whose stock trades on a U.S. stock exchange — and a private one.

Public companies must adhere to stricter reporting requirements, including filing quarterly financial statements that can be viewed by the public on the Securities and Exchange Commission's website. They also face prying questions from Wall Street analysts, whose reports can sway investor opinion.

Private companies, on the other hand, generally can avoid publicly sharing their financial information. That might be a bonus for the company itself due to reduced scrutiny, but it leaves investors with less ongoing information to base investment decisions on.

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After an inside look at Tesla’s Model 3 factory, one analyst says producing 8,000 cars a week is possible

Mason Trinca | The Washington Post | Getty Images
Damien Boozer and Paul Jacob work on the general assembly of the Tesla Model 3 at the Tesla factory in Fremont, California, on Thursday, July 26, 2018.

Tesla is on track not only to churn out 5,000 Model 3s per week, but could even ramp production up to 8,000 with little impact on its spending.

“Tesla seems well on the way to achieving a steady weekly production rate of 5,000 to 6,000 units per week,” Evercore ISI analyst George Galliers said in a note following an inside tour of the company's facilities.

“We are incrementally positive on Tesla following our visit. We have confidence in their production. We did not see anything to suggest that Model 3 cannot reach 6,000 units per week, and 7,000 to 8,000 with very little incremental capital expenditure.”

The numbers appear so good, Galliers said, that the brokerage's current Model 3 production estimates for the second half of the year may be as much as 7 percent too low.

In a note entitled “Just Got Back from Tesla…,” the team of Evercore analysts detailed what they considered a number of optimistic signs at the company's Fremont, California facility. Among the operations the analysts visited, the team was most impressed with Tesla's general assembly and stamping segments, which “met or exceeded all the benchmarks which [they] had been for.”

A major component of the production process, stamping involves the molding of sheet metal into auto parts.

“From what we saw, it appeared that Tesla's Model 3 press is able to run two parts together (both right and left door),” Galliers explained. “While we were unable to determine hits per hour, when we asked an engineer, the response was a confident 'we're not telling you that but plenty.' Stamping seemingly has the capacity and capability to support all Model 3 targets and potentially future vehicle models as well.”

The analyst also commented on what's become known as “The Tent” at Tesla, a new assembly line sheltered under a tent in the company's parking lot.

In its race to both drive cash flow and pacify increasingly irate bondholders, the company quickly added the second assembly line, officially known as General Assembly 4. Musk has since confirmed that the line was making all of the high-spec Model 3s.

The upbeat comments from Galliers come amid a growing cloud for Tesla chief executive Elon Musk, who recently tweeted that he would be privatizing the electric automaker at $420 per share.

“Focusing on the fundamentals and setting aside talk of privatization, we are incrementally positive on Tesla following our visit,” the analyst said in the note Thursday.

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The Securities and Exchange Commission has served Tesla with a subpoena, according to The New York Times, following Musk's claim that the funding to take the company off the public market has already been secured.

Evercore has an inline rating on Tesla's shares and a $301 price target; the stock closed Wednesday at $338.69 and was up down about 1 percent in early trading Thursday.

The analyst said he would consider moving his target price and earnings forecasts higher only after making material adjustments to his Model 3 revenue per unit (RpU) and gross margin assumptions. The “key questions” remaining are whether Tesla can sustain current RpU through 2019 and can hold a 25 percent gross margin.

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Tesla Model 3 is ‘military-grade tech years ahead of peers’ but still expected to lose money

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1:06 PM ET Thu, 16 Aug 2018 | 04:02

Tesla's Model 3 sedan is blowing engineers away, but it might be a big headache for folks in finance.

Analysts at UBS pulled apart three different electric cars to compare their technology and production costs: a new Tesla Model 3, a 2014 BMW i3 and a 2017 Chevy Bolt.

The engineers hired by UBS to examine a $49,000 2018 Model 3 were “crazy” about the powertrain, “highlighting next-gen, military-grade tech that's years ahead of peers,” said UBS analyst Colin Langan in a note dated Wednesday. But the costs were higher than expected, and the cars would lose about $6,000 each at Tesla's original plan to sell an entry model at $35,000, he said.

It is another sign Tesla may have trouble turning into the mass-market automaker it said it wants to become.

Plans to manufacture the lower-cost vehicle have been delayed since its announcement in 2016 as the electric car manufacturer struggled to meet demand. CEO Elon Musk said in May that manufacturing the Model 3 at that price “right away” would cause Tesla to “die.”

The company had originally billed the Model 3 as a sleek electric vehicle for the masses, and the car that would turn Tesla from a smaller maker of expensive electric cars to a volume manufacturer.

Instead, Tesla focused on higher-cost versions that yield better margins. The profit margin on the $49,000 version UBS tore apart was about 18 percent, for example.

UBS hired the engineers for a breakdown of each car's powertrain and battery, electronic controls, frame and body as well as interior and safety features. They evaluated each part's design, ease of manufacturing and cost.

Tesla beat its two competitors in cost, but the Model 3 didn't have has big a lead over the other automakers as UBS had expected. UBS based its estimates on consultations with engineers and industry research.

Tesla, Chevrolet and BMW were not immediately available for comment.

However, some of the Model 3's technology seems to be far ahead of Chevrolet and BMW. In particular, Tesla's electric powertrain stood out as exceptionally simple and flexible.

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With Elon Musk’s visibility ‘there is incredible isolation,’ leadership expert says

Many leaders feel like Elon Musk does, says expert
3:46 PM ET Fri, 17 Aug 2018 | 03:34

Tesla CEO Elon Musk's feelings of exhaustion “are not uncommon for leaders” in his position who face growing pressure, leadership wellness expert Lowinn Kibbey told CNBC on Friday.

“I think what Musk has done is illuminate an issue that many leaders feel,” Kibbey said on CNBC's “Closing Bell.”

Following months of bizarre behavior from Musk, The New York Times published an extended interview with the Tesla CEO in which he said the past year has been “excruciating” and “the most difficult and painful” of his career. In the emotional interview, Musk revealed he has been working as much as 120 hours per week, which caused him to work through his birthday and almost miss his brother's wedding. The CEO also revealed that when he gets a rare moment of shut-eye, it is often with the help of sleep aid Ambien.

Shares of Tesla tumbled 8.9 percent Friday after the interview was published.

Kibbey is global head of the Johnson & Johnson Human Performance Institute, which runs a program that works with athletes, the military and Fortune 500 CEOs to train them for high-pressure roles. He said the nature of the CEO role, as well as other high-level executive roles, has become more stressful with the advent of social media.

“The CEO role is an incredibly, highly visible role. There is tremendous stress in it. And over the last, say, five years, that stress has grown even greater, with complete visibility — from social media, pressure from activist shareholders, short sellers,” Kibbey said.

“With that visibility, though, there is incredible isolation. It is very difficult to share what's going on in a way where you feel that people can have empathy and that you can trust them,” he added.

It's Musk's erratic behavior, both on social media and off, that has invited much of the recent criticism of his character and management style. Most recently, his tweet that he would take Tesla private at $420 per share and had “funding secured” has invited scrutiny from the Securities and Exchange Commission.

In July, he took to Twitter to call a British cave diver who assisted in the rescue of a Thai boys soccer team a “pedo guy.” During Tesla's first-quarter earnings call in May, Musk dissed analysts, cutting off Sanford Bernstein's Toni Sacconaghi because of what he called a “boring, bonehead” question. Musk later apologized to Sacconaghi and to the diver, Vernon Unsworth, for his comments.

As executive roles change, companies should change their approaches to training those executives, Kibbey said.

“There has to be a whole-person approach to this. No one has talked about this before; it's always been about what results have you driven in Q3 or Q4,” Kibbey said. “But the truth is, if that leader is not showing up physically well … if the mental, emotional resilience is not there, if the character-driven leadership is not there, that creates risk.”

The stakes may be high, but Kibbey said that doesn't mean Musk should step down as CEO and chairman. Instead, he applauded the entrepreneur for his transparency.

“This problem is common, and what Elon has done today is courageously talked about the pressure of that role,” Kibbey said.

Elon Musk’s stunning interview was a $1 billion gift to the short sellers he loathes

VCG | Getty Images
Elon Musk, Tesla CEO, addresses a press conference in October 2015.

The investors betting against Tesla just got a gift from the company's chief executive, Elon Musk.

Mr. Musk opened up on Thursday in an emotional interview with The New York Times about the toll the past year has taken on him, blaming those so-called short-sellers for much of his stress. It followed his cryptic tweet last week about converting the publicly traded company into a private one, which created a frenzy in the market.

The day after the interview, the stock of the electric-car maker tumbled 9 percent to $306.

Those losses were gains for the short-sellers. The slide in Tesla's shares generated more than $1 billion in profits for short-sellers, according to S3 Partners, a financial technology and analytics firm, which tracks the positions held by those investors.

The stock drop helped them recover much of their losses that came on Aug. 7, the day Mr. Musk tweeted he was considering taking Tesla private at a stock price of $420. Short-sellers lost $1.3 billion that day after Tesla's shares jumped 11 percent on the news.

Tesla’s slashing of expenses may be costly as Elon Musk pushes a take-private deal

Getty Images | Diego Donamaria
Tesla CEO Elon Musk.

As questions swirl about whether Tesla will go private — and the well-being of its chief executive, Elon Musk — one crucial factor looms large over the fate of the electric car company: Tesla's own financial health.

The company has undertaken drastic measures as it seeks profitability, cutting costs and even erecting a tent-covered third assembly line at its manufacturing plant. But many of those tactics may not be sustainable for long, and some could even hurt the company down the road.

The state of Tesla's balance sheet, and particularly its near-term cash position, are important to the company's future, perhaps even more so since Mr. Musk's surprise declaration on Aug. 7 that he would explore taking the company private.

In an emotional interview with The New York Times last week in which he discussed the ''excruciating'' year he has had, Mr. Musk said Tesla would soon be in the black.

''Tesla is going to be profitable and cash flow positive,'' Mr. Musk said. ''From a Tesla standpoint, I think it is a good place.''

His remarks echo what he said on the company's most recent earnings call, when he predicted the company would turn a profit in the next quarter.

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Mr. Musk is under intense pressure from Wall Street to make good on that promise, and Tesla has been plagued by manufacturing issues while ramping up production of its mass-market Model 3.

Meanwhile, short-sellers continue to target the stock, injecting a destabilizing element to the company's share price. Good financial results would be bad news for the hedge funds betting Tesla will fail, and serve as vindication for Mr. Musk.

And Tesla's financial position will have a significant impact on any potential effort to take Tesla private. Investors evaluating a potential take-private deal will be assessing not only Tesla's long-term prospects, but its current cash on hand and debts.

To achieve that profitability, Tesla is scrambling to slash spending in almost all areas of it operations.

In June, it announced it would lay off about 3,500 employees, about 9 percent of its work force, in a cost-cutting move. It has approached some suppliers about refunding some money Tesla has paid for projects that are still underway.

Tesla has said it is working to reduce costs by delivering completed vehicles faster. At the end of second quarter, it held inventory valued at $579 million, a figure the company said was ''a substantial increase'' from previous quarters.

And Tesla has even more drastic cost cutting plans in store. It has said it plans to cut capital expenditures by a fourth this year — to about $2.5 billion from $3.4 billion in 2017.

''There are a lot of levers they are pulling to be cash-flow neutral or positive in the second half, but there's trade-offs,'' said Toni Sacconaghi of Sanford C. Bernstein.

Tesla declined to comment for this story.

But while analysts say Tesla may very well achieve profitability soon, the spending cuts necessary to do so could be costly, delaying the introduction of new models that could help boost revenues.

''Those are not necessarily the best for the long-term growth of the company,'' Mr. Sacconaghi said. ''Cutting back on capex is not sustainable,'' he said, referring to capital expenditures. ''Cutting inventories is not sustainable.''

What's more, Tesla's push to conserve cash will soon be complicated by two bond payments that come due in the next several months.

It is scheduled to pay off a $230 million convertible bond in November, and a payment of $920 million on a second convertible bond is due next February. Tesla could pay the second bond in stock instead of cash, if its share price is above $360. It has traded above that level in recent weeks, but on Friday it closed at $305.50.

Tesla has slipped into financial difficulties, in part because of how much cash it has been using up — nearly $1 billion every three months. It ended the second quarter with $2.2 billion, down from $3.3 billion at the beginning of the year.

The company's precarious cash position prompted Moody's Investors Service to downgrade Tesla's debt in March, citing ''the likelihood that Tesla will have to undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity shortfall.''

Mr. Musk has said no such capital raise would be necessary, because Tesla will soon be profitable. But Bruce Clark of Moody's said he still expected the company may have to tap the capital markets.

''The company has made some important progress with the Model 3 production and has reduced capital expenditures, but I still think they are going to need additional capital,'' Mr. Clark said. ''It's not as tight as it had been, but they have to stay on the track they've been on recently.''

Mr. Musk has said that the production issues that bedeviled Tesla earlier this year are being resolved.

In June, the company hastily built an assembly line in a gigantic tent outside the walls of its plant in Fremont, Calif., in an effort to speed up production of the Model 3. That extra assembly line — along with the removing of bottlenecks in the two indoor lines — has enabled Tesla to put the output level to 5,000 per week, up from fewer than 3,000 cars per week in May.

Those gains have required round-the-clock production, however, which may not be possible for Tesla to sustain. Other automakers have found 24-hour production is untenable in the long run because workers become burned out and machinery tends to break down more frequently.

Further complicating Tesla's financial future is a Securities and Exchange Commission inquiry into Mr. Musk's tweet announcing that he was considering taking the company private. The commission is expected to begin meeting with Tesla executives this week.

To deal with the investigation, the Tesla board and the special committee of the board evaluating a potential buyout, have each retained law firms. Additionally, the special committee has retained a crisis communications firm, and other public relations firms are angling for assignments.

Those legal fees will add up, and the threat of lengthy legal proceedings could also complicate Tesla's efforts to raise more cash should it need to.

Early Sunday morning, Mr. Musk took to Twitter and reminded his followers just how hard he is working as he struggles to make Tesla profitable.

Responding to a post from Arianna Huffington, the Huffington Post founder and member of Uber's board of directors, who suggested he take a vacation and focus on his physical and mental health, Mr. Musk said: ''I just got home from the factory. You think this is an option. It is not.''

TSLA

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Elon Musk should consider working with distributors, delegating more, ex-Toyota exec says

Musk treated well now and maybe better if Tesla doesn't go private: Former auto exec
4 Hours Ago | 03:54

Tesla CEO Elon Musk needs to delegate more and work with an outside distributor if he's going to make the electric car maker “sustainable,” Jim Press, former COO and president of Toyota Motor Sales U.S.A., told CNBC on Monday.

“You need to have a marketing organization, have to have sales, you have to have an active distribution channel, and you really do need day-to-day management operation. You can't sit by the plant and spend the night there to run everything. You can't funnel everything through one person,” Press said on CNBC's “Closing Bell.”

Tesla has battled widespread criticism since Musk's Aug. 7 tweet that he was planning to take Tesla public and had “funding secured,” which may have violated Securities and Exchange Commission rules. In a blog post, Musk attempted to clarify that his claim about secured funding was based on repeated and ongoing conversations with Saudi Arabia's sovereign wealth fund, which was cast into doubt when it surfaced on Sunday that the fund is in talks to invest in a Tesla rival.

Going private is one way to avoid close scrutiny by the public market, which Tesla has faced in recent months as it fought to meet Model 3 production goals. Some analysts speculate Musk has wanted to take Tesla private for a while, and the press and shareholder hype surrounding Model 3 production goals hastened his ambitions.

Despite Musk's concerns, Press, who was also the deputy CEO of Chrysler, said the market has been pretty fair to Tesla so far, especially when compared with legacy motor companies, such as Ford. But now, he said, “There's some reality coming into it,” meaning Tesla will have to get profitable or face ongoing market adjustment.

“The reality is, the market treats him very well. If you look at the market cap of Tesla, $50 billion, compared to Ford, that makes a profit — the stock is about $9 — it shows the disconnect, and there is an adjustment that's occurring,” Press said.

Tesla shares closed out the day up 0.96 percent at $308.44.

To get profitable, Press added, Musk needs to learn to delegate, both within the company and without.

“I always have a saying, and that is, you don't have stress, you should give it. And [Musk] doesn't have anyone to give it to,” Press said.

Press said Musk should hire someone to “run day-to-day” operations while he works at “30,000 feet” and should look outside of the company for independent distribution channels, such as third-party dealerships.

“He is the only one that's trying to run the distribution channel and capitalize that at the same time. There's a whole opportunity there for an independent distribution channel to take half the work load off and create the sales,” Press said.

And as for going private, Press said it may be best for the carmaker to stay put, rather than risk the unknown pressures from the private market.

“I understand the frustration, but going private may not be the best. You know, the devil that you know — versus the devil you don't — may actually treat him better,” Press said.

Tesla did not immediately respond to CNBC's request for comment.