August 23, 2019

Breakingviews: A VW-Tesla marriage looks heartbreakingly remote

by Breakingviews.

There’s logic to a Volkswagen-Tesla alliance. But cooperation will only become likely if things get a lot worse for Elon Musk’s $40 billion electric-car maker.

Tesla’s shares jumped almost 2% as the stock market opened on Thursday after a report that VW Chief Executive Herbert Diess is interested in acquiring at least a stake in Musk’s company. “Diess would go in right away if he could,” said one of his top managers, according to Manager Magazin. VW denied the report, mostly erasing Tesla’s gains.

It’s easy to see why the $80 billion behemoth would be interested. Electric batteries will be the most expensive part of future cars, and UBS analysts reckon Panasonic battery cells produced in Tesla’s gigafactory are 20% cheaper than the next-cheapest option. Meanwhile Musk’s company makes its own computer chips and can tweak features like a car’s suspension remotely through software updates. Diess could leapfrog his rivals with technology like that.

Tesla, meanwhile, needs VW’s manufacturing nous. It produced 11 million vehicles in 2018; Tesla struggled to churn out 2% of that amount. Musk’s group also looks set to burn about a net $500 million of cash this year, using Refinitiv estimates. Being able to tap into the 20 billion euros of net cash VW is likely to have stashed away by the end of this year, according to Refinitiv data, would be a big plus.

Yet an alliance between Diess and Musk, who meet twice a year according to Manager Magazin, is hard to imagine. First, Musk is one of the few automotive CEOs to not show any interest in cooperating with rivals, let alone striking deals like VW has this year with Ford Motor. That would seem to rule out selling a chunk of the company to a rival.

A full takeover also looks unlikely for now. Tesla’s equity is worth about 200 times its earnings over the next 12 months, on Refinitiv data, compared with VW’s 5 times multiple. That ought to make a merger a tough sell to any investors, let alone to the controlling Porsche-Piech family. In any event, Diess would probably have to fork over even more – some $50 billion, assuming a 25% premium – yet would end up with a crazily overvalued business in need of investment and struggling to fix production, logistics and quality problems. Better to wait for Tesla’s valuation to slow to a realistic tempo.

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