August 27, 2018 / 8:04 PM / 3 months ago

Breakingviews - Tesla recharge rests in board’s hands

NEW YORK (Reuters Breakingviews) - Chief Executive Elon Musk’s abortive buyout dalliance has hurt his credibility – and may result in legal and regulatory censure. Getting the $53 billion company back on the road requires its cozy directors to do more of the driving. Breakingviews imagines the advice a consultant might give Tesla’s board.

Tesla Model 3s are shown charging in an underground parking lot next to a Tesla store in San Diego,California, U.S., May 30, 2018. REUTERS/Mike Blake

To Tesla’s independent board members,

After Elon dumped his plan to take Tesla private last week, you asked our firm to switch from advising you on a potential deal to laying out what the company should do next. Below please find our initial findings.

The most pertinent lesson of the buyout brouhaha – and, frankly, incidents like Elon calling one of those who rescued the Thai boys’ soccer team a pedophile – is that you need to be a far more active and involved board. That doesn’t mean you should all be donning overalls and hitting the factory floor, spanners and torque wrenches in hand.

Rather, it’s time to get your house - and Elon’s - in order. Let’s start with the board. It’s perceived as being too closely aligned to Elon. Only three of you have no other ties to him. You put Brad Buss, who was finance chief for SolarCity, on the special committee to evaluate any offer Elon might make. And Elon and your lead director, Antonio Gracias, go way back. We strongly recommend you consider making someone else head of the board.

You don’t do yourselves any favors, either. For example, you stayed silent about his Thai “pedo” tweet. And you waited more than a day to publicly announce the end of a buyout bid, seemingly so that Elon could get his own comments in order. And then you made it seem as if you were trying to bury the news by releasing it just short of midnight New York time. On a Friday. It all reinforces the perception that you’re too chummy with Elon.

You can alter that by properly addressing his weaknesses. First, we recommend that you narrow his focus. It may be good for morale to see the boss helping out on the factory floor, but it diverts his attention from running the business. His emotional interview with the New York Times is just the latest evidence that he has spread himself too thin.

Ideally, you should be pushing him to relinquish his leadership roles at SpaceX and the Boring Co – or at least going on furlough until Tesla’s “production hell” is over and the company is solidly profitable. Hiring a chief operating officer, as SpaceX did, would also help.

Speaking of goals, we further strongly suggest you force Elon to lower his production targets. He has too often overpromised and underdelivered. That has directly contributed not just to his poor mental state. It’s also playing a role in mounting quality problems with new Model 3s and a dearth of spare parts and service times for those already on the road. You even have reporters and short sellers, sometimes armed with drones, monitoring the factory lots for evidence production has slowed.

He needs to dial back his financial prognostications, too. Perhaps Tesla will become sustainably profitable in the second half of the year. But the company has burned through $1.8 billion so far this year, has just $2.2 billion in cash on hand and $1.1 billion in debt coming due by March.

It’ll probably require a $3 billion improvement in cash generation by the end of December to avoid a calamity. But instead of raising capital to cover any potential shortfall, Elon has spent 2018 playing a dangerous game of chicken.

Many shareholders may be more than willing to help out if you go to them cap in hand again. That was at least one positive takeaway from the buyout fiasco. That of course assumes Tesla is actually able to sell more stock – or bonds – while the Securities and Exchange Commission investigates Elon’s Aug. 7 tweets about having “funding secured.”

These could be goals to put into his compensation package, along with running any and all Tesla-related tweets past compliance and limiting his time working in the factory. Though with Elon it may be more effective simply to threaten to remove him as CEO.

Sure, lowering targets and raising capital may tank the stock. But even if it halved, Tesla would still trade at 17 times 2020 earnings – far higher than any major automaker. And if these measures help make the company, and Elon, more reliable, it ought to be just a bump in the road.

Yours faithfully,

Phil R. Upp

Ere, Wego, Agin Advisors, LLC

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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