Tesla loses its magic touch

Tesla is producing too few cars, running out of cash and facing legal trouble. Founder Elon Musk’s flippant attitude isn’t helping. Alice Gråhns reports.

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Elon Musk's smirk is beginning to grate

"Elon Musk is seen as the face of Tesla," say Therese Poletti and Jeremy Owens on MarketWatch. But with the electric-car company embroiled in "yet another storm of bad news, the constant smirk he wears is growing even more worrisome". Tesla has had one of the worst weeks in its 15-year history. It has come under regulatory scrutiny for the second crash this year involving Tesla's driver-assistance system Autopilot, the latest of which resulted in a fatality. A Delaware court last week allowed a shareholder lawsuit over Tesla's $2.6bn 2016 acquisition of SolarCity to go ahead.

Credit-ratings agency Moody's downgraded Tesla's credit rating further into junk territory, noting that production problems with the Model 3 could necessitate a capital raising of over $2bn. Meanwhile, Musk himself "risked coming off as tone deaf to investors' concerns" by sending a series of tweets on April Fool's Day joking that Tesla had gone bankrupt, says Dana Hull on Bloomberg. Tesla's shares plunged by 6% early this week; they have lost 23% in a month.

Burning through cash

"There are plenty of reasons why Tesla's magic touch with the capital markets is fading fast," says Charley Grant in The Wall Street Journal. For a start, the firm's financial statements "paint an alarming picture of the group's long-term viability". Tesla had $3.4bn in cash at the end of the year and raised an additional $550m from bonds in February. However, not all of that is available for spending. Meanwhile, Tesla burned through more than $3.4bn last year. If it maintains that pace, it will run out before this year ends.

The firm's efforts to prove its "haters" wrong just proves them right, says Liam Denning in Bloomberg Gadfly. Indeed, "calling those expressing scepticism haters' serves only to underline the cultish aspect of Tesla's stock". The mystique surrounding the stock has allowed Tesla to rustle up some funding "in the absence of generating its own". But now the sense of excitement is rapidly wearing off, Tesla's "dependence on the kindness of strangers is thrown into glaring relief".

Just as irritating and counterproductive is the group's emphasis on short-term targets such as a weekly production figure right at the end of a quarter: Tesla made a big fuss about producing 2,500 Model 3s in a week. But its Model 3 targets have "been changed so much" in recent years that they can hardly be taken seriously.

In 2017, for instance, the total number of Model 3 deliveries ended up being a tiny fraction of the group's original estimate. The upshot is that Tesla has "built a footprint, market cap and balance sheet sized for a mass-market producer of cars", but lacks the cars. "Until it fixes that, sustainably", its dependence on external funding will only intensify. "Positive cash flow quarter-in, quarter-out would render the haters, real or imaginary, largely irrelevant."

Takeda ponders ambitious bid for Shire

"The market is doing its job," says Chris Hughes on Bloomberg Gadfly. After a longer period of poor performance, London-listed drugmaker Shire has attracted the attention of Takeda Pharmaceutical, Japan's largest drugmaker, which has said it is considering a bid. The deal, if it goes through, would create one of the world's largest drugmakers by sales, ahead of AbbVie and Eli Lilly. It would also mark the largest-ever outbound acquisition by a Japanese firm.

Shire's stock has slumped 45% in the last 15 months, "mostly the result of the poorly received acquisition of Baxalta" in 2016, adds Hughes. Even after gaining on Takeda's interest, the shares trade at a discount to peers on earnings and earnings before interest, tax, depreciation and amortisation (Ebitda) multiples. Yet "a full-blown takeover would be highly ambitious perhaps too ambitious" for Takeda.

It would be "a big stretch", agrees Lex in the FT. At about £30bn (4.4tn), Takeda's market capitalisation is only £2bn more than Shire's before news of the bid emerged. Including a bid premium of perhaps 30% and Shire's net debt of £13.5bn, a takeover could cost it £50bn.

Takeda now has until late April to decide whether to put in a concrete bid for Shire, but other rivals like AbbVie, which tried to buy Shire in 2014, or Sanofi, may pounce, says Jacky Wong in The Wall Street Journal. US drugmakers have found it tougher to achieve growth through price increases in recent years, so they are eager to sniff out acquisitions. Indeed, "the hard work is just beginning if Takeda wants to secure a Shire deal".

City talk

Melrose has narrowly won the battle for GKN, says Neil Unmack on Breakingviews. Public debate has raged over whether Melrose's model of buying and breaking up companies was suitable for a group with 6,000 employees and government contracts. The government has duly extracted commitments that Melrose will not sell GKN in the near future and will maintain research-and-development spending at current levels.

This shows that "even a centre-right, pro-business government cannot leave the fate of companies completely up to markets". It also suggests that would-be acquirers of other UK companies will "face a more interventionist government".

"It always seemed unlikely that the future independence of Sky News would prove an insurmountable obstacle to the Murdochs' £11.7bn full takeover of Sky," says Nils Pratley in The Guardian. This week we got a "belt-and-braces" remedy: if the government continues to object, the news channel will simply be sold to Disney even if the latter fails to complete its $66bn takeover of most of Murdoch's 21st Century Fox empire. "That clause looks to be a clincher." One could hardly object to Fox scooping up Sky if Sky News is then promptly "flipped to a new owner [without] media plurality baggage".

Apple has just "thwacked the biggest US chipmaker", says Lex in the FT. Shares in Intel fell 9% this week after a report by Bloomberg claimed Apple was planning to replace Intel's chips in the Mac computer by 2020 with its own. But Intel isn't nearly as vulnerable to Apple's plan as it would be if Dell, Lenovo and HP, its three biggest customers last year, switched to their own chips; they jointly accounted for 40% of sales. Luckily, however, none of them has Apple's resources.

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