General

Taking Tesla private and having the shorts pay for it

edited November -1 in General
TDLR; A short squeeze could easily pay for the whole takeover!

I am going to lay out an interesting theory by first giving some facts as to Tesla and then telling the story of the Porsche takeover of VW.

A bit of detail: There is about 25% of available Tesla stock that is on loan to shorts. Yes, 25% of available stock!

Keep the above fact in mind as I outline what happened with Porsche and the VW takeover.

In March of 2008, Porsche owned 31% of VW and stated publicly that it did not intend to increase that to 75%. Lower Saxony holds 20%, so Porsche reasoned it would be too difficult and expensive to acquire basically all other shares on the market.

On 26 Oct 2008, Porsche revealed that it had increased its stake from 31% to 43%, plus 31% in options -- 74% of the shares of VW.

Problem: as of that date, 13% of the company was on loan to speculators short the stock, and 74% + 20% + 13% = 107%. So if Lower Saxony didn't intend to sell them any (it didn't), and Porsche didn't intend to sell them any (it certainly didn't), the speculators would be completely incapable of covering those short positions. To add insult to injury, the other 6% belonged to index-tracking funds, also unlikely to sell on short-term moves.

In other words, Porsche could pretty well set its price and force the speculators to pay it. The price exploded, going from 200 to 1000 per share in just a couple of days.

Porsche was clear that their intent was not to corner the market but to takeover VW, which had long been part of their plans. Either way, due to the massive short squeeze, hedge funds and investment banks ended up paying for a huge portion of Porsche's costs to acquire VW, with tens of billions in losses.

So, now, let’s look at what Elon is maybe doing - he personally owns 20% of the company. He just tweeted a $420 price which is high enough that he could easily get significant number of options for that price. If the shares he owns plus the options plus those not going to sell leaves less than 25% remaining, what is going to happen to the shorts? They will end up driving the price very high - let’s say 5x like with VW so we get close to $2,000 per share. Elon can help fill those shorts from some of his actual shares at huge profit and turn around and pay for all of the options he has at the $420 price he just set. Thus, not only do the shorts lose their shorts (and shirts) but they effectively fund the cost of taking Tesla private.

The trick is tying up, say, 80% to 90% of the stock (via direct holdings *plus* options) in some way (such as the story from Porsche's purchase of VW) For example, note that earlier in the day, before the stop in trading and Elon tweet about taking Tesla private, the Saudi Arabia sovereign wealth fund announced a 5% stake in Tesla. Likely a friendly, will not sell type of stake and significant enough to get over the line to run such a squeeze play.

Anyway, maybe I am looking at this too deeply but if I were playing at this game, that would be my play to both dump the shorts and take Tesla private.

Comments

  • edited August 2018
    Note, this is just my opinion and my read of the situation but I do believe it to be very possible and that Elon is smart enough and bold enough to make such a play. He even has been indirectly encouraging share holders to hold onto their shares - which will make the short-squeeze that much more effective.
  • edited August 2018
    PS - I still think my idea from last week of having the Tesla store selling some Tesla branded shorts would be oh so funny.
  • edited August 2018
    yes
  • edited August 2018
    A lot of us here hold TSLA. I was debating whether to sell at $420 or hold on as an investor in the private company. If holding onto my shares helps to squeeze the shorts, count me in!
  • edited August 2018
    My thoughts were-is it legal first.
    Marketwatch helped me there-everything Elon did was legal as long as he has signatures from investors to cover the 420 price. Now he would need majority shareholder support. Based on his tweet saying 'considering' SEC allowed it regardless as it was a warning to shorts-he's being nice giving them a heads up and removed the halted trading.

    2nd is it enough. I personally was looking for 1500/shr in 2025. If going private would help Elon and Tesla focus on what's important (which I think it would) I'm all for it. Take some stress off the workers and BOD to focus on only what's important-quality productivity.

    3rd how soon would this happen? This is still unknown.

    As for puts and calls-sorry you're not a shareholder and I couldn't give a flying f about you. You're gamblers. You're grown ups so deal with it and man up. Elon did puts a favor by telling them now before it happened. I've seen biopharms do this and kill the shorts into well you know from here.

    I'm for going private in a legal and responsible way. I wanted 100.00 premium per share but if 420 will help Tesla focus and it will happen really soon - like 2 weeks or so-I'm all for it.
  • edited August 2018
    @Michael Sinz,
    Good one!
  • edited November -1
    @Michael Sinz, thanks for your analysis, makes sense to me. I am all in for Tesla going private, as a long time TSLA investor.
  • edited August 2018
    @Michael Sinz,
    Good one!
    I am in,,,
  • edited August 2018
    Japan is the funding source!

    At the end of last quarter when the shorts were deafening with FUD, I was speculating Tesla has lots of access to cash. One specific thing I mentioned was Japanese credit markets. The interest there is nearly zero or negative and they are struggling to find good investment.

    Looks like it is Japan that is going to help Elon take it private, not the Saudis. [1]

    It would make sense. Japan has cash sloshing about its bond markets, looking for opportunities to invest. It has traditionally been very strong in automotive sector and electronics. Its foray into NY, Hawaii real estate or Media markets are not great success stories. But electronics, automotive industries, they understand and they invest well. Tesla is a marriage of electronics and automotive tech. Panasonic is already a big partner. So it is likely to fly.


    =============================
    [1] https://markets.businessinsider.com/news/stocks/tesla-stock-price-elon-musk-met-softbank-ceo-about-taking-private-report-2018-8-1027443866
  • edited August 2018
    Looks like the market doesn't think it's going to happen.
  • edited August 2018
    @ravis, all this tells me is that Elon has been looking for funding to go private for over a year. Leads me to believe he really does have funding secured, probably from multiple sources. Japanese funding does make some sense.
  • edited August 2018
    Is going private AND allowing any current investor remain in may not be possible.

    https://arstechnica.com/cars/2018/08/theres-a-big-problem-with-elon-musks-plan-to-take-tesla-private/

    And if Elon/Tesla can finagle a way to do it, is $420 even a reasonable price? It's disappointingly low in my opinion. Giving up liquidity in my investment hurts it's value. A 15% premium for that just is not an attractive offer. My short term estimation for the stock price is $588 when investors psychologically run the price up to a $100B valuation for the company. That is well within reach in the near future, so THAT is what I'd like to see for my shares.
  • edited August 2018
    Not sure what the problem is. It has to be an opt in. If it goes private all existing shareholders get a choice, take it in cash or shares in the private company.

    Why is that not possible?
  • edited August 2018
    @Rutrow S, +1 Huh. That is a really informative article.

    @ravisundaramam, Quote: "Not sure what the problem is. It has to be an opt in. If it goes private all existing shareholders get a choice, take it in cash or shares in the private company. Why is that not possible?"

    Try reading the article.

    "According to Sjostrom, companies are required to comply with public-company disclosure rules if they have more than 2,000 shareholders."

    That rule is apparently there to avoid one of those loophole situations, where a company does have a widely traded stock with thousands and thousands of shareholders but gets to pretend that they aren't a publicly traded company. So private companies have to be a relatively small group of owners/stockholders. It's pretty obvious that Tesla would have more than 2,000 individual stock holders.
  • edited November -1
    "According to Sjostrom, companies are required to comply with public-company disclosure rules if they have more than 2,000 shareholders."

    The article didn't really explain the problem with that. Let's assume that the reason for going private isn't to get around disclosure rules but just to be able to focus on the long term goals without getting hammered constantly about stock price? Honest question -- does that still work? It seems like the articles I've read can't comprehend a company, much less its shareholders, wanting to focus on the long term.
  • edited August 2018
    @Rocky_H: Yes, Uber is not a taxi company but ride hailing company, did a complete end run around all the taxi laws. Same with Air B&B

    Remember this: Corporations are people. But unlike ordinary people who take 9 months to create and 18 years to get the right to sign contracts, corporations can be created for a filing fee in 15 minutes. There is no visa work permit issue, and they can be killed off any time. They can selectively pass assets one way but stop the liabilities!

    So there could be one publicly listed mutual fund, that invests in private Tesla. The rules for disclosure, reporting and trading for mutual funds are different. It can easily impose 6.75% withdrawal fees for the first year. You can 1999 such private mutual funds investing in private Tesla before forcing Tesla with quarterly calls. There are tons of such mutual funds already investing in private companies and corporations. There are real estate investment trusts they too have a different model for reporting and dividend management.

    If Tesla has the funding it can find a way to let the current shareholders to hold their stake optionally. They might not get shares, but debentures or faux shares that look like shares, walk like shares, but are not shares, SEC needs to prove in a court they are defacto shares to bring it under regulation.

    Heck, how AEG called itself a thrift and avoided all disclosures and brought the whole financial system down?

    You and I, obey the laws.

    They, shop around to find which law to obey.

    Even bigger then create their own loop holes to the law everyone else obeys.
  • edited November -1
    @ravis, I'm not going to dignify trying to address that. We are talking about what is legally allowed--not how companies can try to get away with breaking the law.
  • edited August 2018
    It is not breaking the law.

    It is legal for a mutual fund to invest in private company.

    That mutual fund will be counted as one investor, legally.

    So it will not break the 2000 investor count limit, legally.

    That mutual fund will follow mutual fund disclosure, prospectus, investment and redemption rules. Present Tesla investors can opt in and continue their investment in private Tesla.

    There is no breaking of any law. It is all above board. At the end of Q1 call, I kept saying the shorts are making assumptions about the cash crunch.

    If he has investors interested in Tesla at 420, the short thesis is shot. Privatization or not. I just hope lots of people called their options at 370 on Wednesday and caused a world of grief to the shorts.
  • edited August 2018
    I think it is becoming a possibility that the shorts will fund privatization with extra profits for the longs. The FUD is going off the wall and I attribute that to their fears being realized. This could be the biggest short squeeze of the century.
  • edited August 2018
    eliezer post appears to be spam links. Nothing to do with stocks or Tesla. Please flag.
  • edited November -1
    Guess my post flag took care of it :) Gone now.
  • edited August 2018
    The OP is a compelling argument and the contrast to what Porsche tried to do is spot on. I do think the shorts may end up paying for it.

    But...

    Don't forget that Porsche ultimately failed to purchase VW. The squeeze it tried to do in 2008 failed and it ended up costing Porsche dearly. The huge debt that they ended up with resulting in VW buying out Porsche a few years later: https://www.theguardian.com/business/2012/jul/05/volkswagen-buys-porsche
  • edited August 2018
    Good point by the op. Shorts will pay at least some of it. As for Porsche it was unfortunate that it chose the worse time to do this. The 08' financial crises made getting the financing through extremely hard at the time. Otherwise the outcome would be very different.
  • edited August 2018
    Note that VW was also not a willing target. I would think that Tesla would not fight against Elon - it would be a willing participant.


    Plus, the financial crisis hit at the same time and every car company got into a bit of a financial crunch since sales fell through the floor and financing for inventory became nearly impossible.
Sign In or Register to comment.