Of LBO’s and Private Co’s.

This is like United Airlines in 1989.

Tesla Model S as electric taxi. Photo: Thomas Mezger. Source: Flikr. CC-BY-2.0

(Full disclosure: Charter Trust holds a modest position in Tesla. This discussion is NOT a buy, sell, hold, tender, tinder, or conflate recommendation. If you think the Global Market Update is a place to get stock tips, you’ve come to the wrong web site.)

That’s what I thought when I heard that Elon Musk tweeted out that he has the financing to take Tesla private at $420 per share. The tweet sent shock-waves through the market, in the same way that United shocked the market 29 years ago.

In September of 1989, United Airlines announced that they had secured funding to take the airline corporation private at $300 per share. The pilots’, flight attendants’, and baggage handlers’ unions had all agreed with management on an employee-owned structure, and they announced that they had the financing to make this happen. The price was jaw-dropping, almost three times where the stock had traded just a few months before.

United Airlines stock 29 years ago. Source: Bloomberg.

That deal didn’t go through. The financing, over $7 billion, dried up when one of the airline’s unions didn’t agree to management’s terms. The day of that announcement – October 13,1989 – is now known as “Black Friday” in the market. The Dow, of which United was a part of, fell 7% that day, and the deal’s breakup helped trigger the collapse of the junk bond market, and marked the peak of the stock market leading into the bear market and recession of the early 1990s.

As details of the LBO became known, it came to epitomize the “Decade of Greed” that seemed to characterize the late 1980s. United’s CEO and CFO stood to receive $77 million and $38 million, respectively, enormous sums at the time. Deregulation had radically changed the shape of the airline industry, and bankers seemed especially eager to book investment banking fees. But the deal fell apart over United’s contentious labor relations, taking the market down with it.

Tesla is different, of course. Elon Musk already owns 20% of the company. Tesla is a young company, having only gone public three years ago. But Musk doesn’t have enough money of his own to buy back all the shares, and he did raise $3.4 billion of equity and $11.5 billion in debt. He has a fiduciary duty to his public shareholders now, whether he likes being public or not. It may be different this time, but it’s never really all that different.

TSLA share price. Not the same as United. Source: Bloomberg

Since Musk tweeted that funding has been secured for his go-private bid, Tesla’s investors, like United’s investors 29 years ago, want to know: where’s the money?

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-08-09T07:39:55+00:00August 9th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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