Investors who believe in Elon Musk’s vision and Tesla’s prospects now have an opportunity to have their cake and eat it.


Chart Tesla, Inc.

Yesterday, in the middle of the trading session - something that’s very unusual in the highly regulated North-American financial communication - Elon Musk announced his intention to privatize the famous electric car manufacturer. 

If a majority of the shareholders approved this proposition, the Tesla shares would be delisted at a price of $420 per share, a premium of 10% compared to its all-time high.

The share currently trades at $380. The arbitrage opportunity is thus surprising, with a spread of 10% potentially catchable on a horizon of a few weeks - meaning the time until the shareholder vote.

Tesla has been a short seller target for months - a quarter of the free float has been borrowed by the latter - who are skeptical about the capacity of the manufacturer to become profitable one day, a goal that Elon Musk, however, promised to achieve before the end of the year. 

The company’s losses are indeed substantial - Tesla has already burned almost two billion during the first semester - and its quarterly production goals remain systematically unaccomplished. 

Tesla has positioned itself in a luxury segment - like Porsche - but disposes however of a real pricing power which it can use to compensate for its much smaller scale than that of competitors like Ford or General Motors. This competitive advantage will last as long as the halo effect around the Tesla brand…

If the privatization happened - something that’s still uncertain given the technical and legal obstacles - the manufacturer could evolve off the analyst radar and as such raise capital to finance its future expansion projects more peacefully. 

The proposition will soon be submitted to a shareholder vote. Musk will undoubtedly vote in favor, just like the Chinese group Tencent who holds 5% of the capital, and the sovereign Saudi fund that holds between 3 and 5% of the capital. It’s likely that Musk would have never taken such an initiative without the consent of these two powerful reference shareholders…

For months now, the distrust towards Tesla is such that the trio will without a doubt hardly have any trouble to gather between 20 and 25% of additional votes in favor of this proposition and obtain the majority. Numerous shareholders, on the other hand, are tired of the recent controversy and should be happy to subscribe to the “take the money and run” option they’re offered…

At $420 per share, the offer values Tesla at around $75 billion, including convertible bonds. Musks stake represents thus $15 billion; cumulated, those of Tencent and the Saudi fund represent about $7 billion. A consortium of private investors able to reach $53 billion remains to be found! 

While this appears huge, such an amount has nothing to be envious about when it comes to other mega deals made these days, like the takeover proposal for Express Scripts by Cigna - a deal that also offers a potential arbitrage opportunity. 

The current situation offers thus an interesting bet for Tesla fans who aren’t a shareholder yet: heads - they will be able to benefit from a dip to invest in a company they believe in; tails - they get out at $420 in a few months with an attractive premium over the acquisition cost. 

Translated from the original article