Elon Musk's dubious deal for Tesla's investors is a hard sell

Mint

4 days ago

Tesla's investors, perhaps a little troubled by the American electric vehicle maker's sagging sales and profits, are to be offered a bonus: A chance to own a slice of an AI model that recently called itself 'MechaHitler." That is but one of the dubious benefits of Elon Musk's plan to have Tesla investors vote on the company investing in his artificial intelligence firm, xAI Holdings.
xAI made headlines for all the wrong reasons last week when its chatbot Grok ran amok with anti-semitic replies to queries, followed swiftly by the resignation of Linda Yaccarino, chief executive of X, Musk's social media platform that was rolled into xAI earlier this year.
If all that doesn't sound like the best time to pitch Tesla investors on buying in, you maybe weren't around for the SolarCity deal in 2016.
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That was when Musk urged Tesla shareholders to buy a faltering rooftop solar company in which he was chair, investor and creditor (his cousin was the CEO). At the time, Musk emphasized the centrality of solar power to Tesla's mission and unveiled a seemingly ingenious product, the solar roof. Today, the solar roof is notable chiefly for its rarity in the wild and Tesla stopped bothering to report solar installations some time ago.
On the other hand, SolarCity was afforded a graceful exit and Musk was repaid the money he had lent to it. From that highly specific viewpoint, despite SolarCity's evident troubles, it was a great time for Tesla to buy.
In this case, it appears Musk intends for Tesla to merely invest in xAI rather than buy it outright. There is scant insight into how xAI is doing financially, since it is privately held. We do know, however, that it issued $3 billion of secured debt, maturing in 2030, at the end of June with a coupon of 12.5%, currently yielding just over 12%. The rough 8 percentage points spread over Treasuries is in the same ballpark as triple-C rated bonds.That doesn't suggest financiers are falling over themselves to fund xAI's substantial cash burn, put at over $1 billion a month by a Bloomberg News report in June. Nor does another report that xAI turned to Space X, another Musk vehicle, for $2 billion.
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On that basis, even a portion of Tesla's reported $37 billion cash balance would help Musk's AI project, in which Bloomberg estimates he holds a roughly one-third stake. Musk floated a figure of $5 billion when he polled X users on the idea last year. Confusingly, he posted about the plan for Tesla shareholders to vote on providing new funding on Sunday, two days after he rejected reports that xAI was raising fresh funds.
Apart from obvious potential conflicts of interest, however, what would Tesla get out of it? I suppose you could argue that xAI's technology would help with realizing Tesla's autonomy and robotics ambitions. But with a full merger seemingly ruled out, for now at least, why would Tesla need to invest rather than just contract xAI's services? More importantly, Musk has been touting Tesla's in-house capabilities on these fronts for years, especially when it comes to robotaxis. The very idea that Tesla needs to kick several billion into a separate company in order to achieve its goals would undermine that narrative.
Another possible reason for Tesla to do this would be to incentivize Musk to stay focused on the company. Recall that one of the arguments advanced last year for reinstating a massive options package for Musk that was struck down by a Delaware court was to ensure that he didn't take his best ideas elsewhere.
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It was a breathtaking and egregious stance for the CEO and director of a major listed company, as well as the board, to take. Musk had founded xAI a year before, so he was already taking at least some ideas elsewhere. One thing to keep an eye on is whether Musk's ruling out of an acquisition ultimately holds. Based on current math, and using the reported $200 billion valuation target for xAI's next funding round, buying the company with stock would help him boost his current stake in Tesla from just under 13%, excluding options, to more than 16% in a combined entity, if all else is equal.
In any case, Musk's pledges of focus aren't exactly rock solid. This is the man who in late April told investors he would step back significantly from his political work, but only to announce he was forming a whole new political party less than three months later.
Regardless, the example of SolarCity, along with Tesla's outlandishly resilient stock, suggest any vote on investing in xAI would be likely to pass. When so much of Tesla's valuation rests on sheer investor faith in Musk, his wishes tend to be more like commands. ©Bloomberg
The author is a Bloomberg Opinion columnist covering energy.