Tesla gets a lesson in buyout realities

This article first appeared in The Edge Financial Daily, on August 13, 2018.
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NEW YORK: Tesla is getting a lesson in buyout realities. Elon Musk’s stated desire to take the money-losing carmaker private has set Wall Street all atwitter. But Dun & Bradstreet’s US$5.4 billion (RM22.09 billion) leveraged buyout, announced last Thursday, is a reminder of what it usually takes: a mature, mediocre and profitable firm. That is a better bet than capital-draining dreams of domination.

Dun & Bradstreet has been in business for more than 175 years, but has barely grown in a decade. Indeed, this stagnation was one reason the company’s former chief executive, Robert Carrigan, left earlier this year. Yet the firm’s business of tracking and analysing corporate credit and risk remains a mainstay for clients and will for many years to come. 

This stability, and the fact the business does not require a huge amount of capital, is attractive to buyers CC Capital, Cannae Holdings and funds affiliated with TH Lee. The company should have just under US$400 million of net operating profit after tax next year, according to Thomson Reuters I/B/E/S. That is about a 6% return, which is not particularly interesting. But throw in some cost cuts and even minor growth, and the potential gains become more palatable, especially considering the firm’s stability means it can take a lot of leverage.

Now compare that to Tesla. The 15-year old company makes some very attractive cars, but not a profit — though Musk has been saying that will happen by year end. Plans to expand autos, trucks, solar power and power storage will require massive investment to compete against giant multinationals with lots of production experience. And much of the firm’s value seemingly resides in the mercurial Musk, who also devotes his attention to trying to colonise space and burrowing under the earth.

Moreover, buyouts are inherently risky for even the best dealmakers. CC Capital, for example, was founded by Chinh Chu after he spent 25 highly profitable years at Blackstone. Yet one of this shop’s first purchases was a company called Constellation Healthcare Technologies (CHT). It went bust this year and regulators charged CHT’s former executives with falsifying documents to sell the company.

When it comes to buyouts, boring, reliable and trustworthy are the big draws. — Reuters