Short-Term TSLA Price Movements - 2016

[FluxCap]

Here's my guess at the odds right now:

55% probability - TSLA acquisition of SCTY goes through.
45% probability - TSLA acquisition of SCTY doesn't go through.

In case that acquisition doesn't go through:
50-75% probability that SCTY declares bankruptcy and stock price goes to 0 within 0-6 months.

When I see people jumping in on SCTY right now (thinking they're getting a good deal), I can't help but think of GTAT. I'm not saying they're identical... all I'm saying is GTAT pops in my mind.

With respect Dave, why in the world do you think there is a 45% probability the deal does not go through?

In M&A when both parties want to get the deal done, the vast majority of time it gets done unless there are regulatory roadblocks, but I don't see antitrust concerns or anything of the sort. I see tons of negative articles in the mainstream media that could convince a few smaller retail investors to vote against the will of the CEO and Boards of Directors of both companies, but I don't even think many will. Tesla is buying a ready-made Tesla Energy workforce and possibly the most recognizable US solar brand for a good, mutually agreeable price. There is no hostility of any kind between the companies. The largest shareholders are absolutely for this. Tesla's stock has already taken the hit. Don't you think your odds are a little off?

 

[eloder]

Those seem quite a bit more pessimistic than anything I'm seeing leads me to believe. Explain your reasoning?

Big investors don't pass up on a blatantly obvious 28% arbitrage gains if it's anything remotely close to low risk. Just my opinion on it, I doubt I'll put more than a thousand or so if I do decide to jump in on this play.

 

[joseph7h]

Here's my guess at the odds right now:

55% probability - TSLA acquisition of SCTY goes through.
45% probability - TSLA acquisition of SCTY doesn't go through.

In case that acquisition doesn't go through:
50-75% probability that SCTY declares bankruptcy and stock price goes to 0 within 0-6 months.*

When I see people jumping in on SCTY right now (thinking they're getting a good deal), I can't help but think of GTAT. I'm not saying they're identical... all I'm saying is GTAT pops in my mind.

*Note: price goes to 0 in case of SCTY bankruptcy because all of SCTY assets get divided up among senior debt holders, and common stockholders get stuck with absolutely nothing.

After these prolonged discussion of the risks added to Tesla by acquiring over-debted Solar City, the odds that acquisition doesn't go through are bigger than ever, EM got a very good chance to be defeated by Tesla share holders!

 

[DaveT]

Those seem quite a bit more pessimistic than anything I'm seeing leads me to believe. Explain your reasoning?

There's actually a lot of factors going into my guess at those odds, some of which include:

After TSLA's initial offer, there's a lot of information in the filings that show a lot of dismalness to SCTY... like SCTY shopping themselves and not being able to find anyone before TSLA's offer... SCTY's difficulty in raising funds... and the possibility of SCTY not being able to pay its bills (thus bankruptcy) in the event that it can't find ongoing financing.

A lot of this info came out after TSLA's initial offer, and it's starting to change investor's minds about the acquisition.

Tesla's second largest institutional investor is openly expressing doubts about the acquisition.

Elon just last Sunday said the following:
Michael Ballaban – Jalopnik, "Hey Elon, thanks for taking this question. Yesterday you tweeted that it had been an unusually difficult couple of weeks. Was that just a reference to the SpaceX launch pad fire or was there something else going on?

Elon Musk – Tesla CEO, "It’s just been a lot. We are still getting a lot of flak for the whole SolarCity thing which I think is unreasonable and you know, there’s a lot effort on the Autopilot, on the Model 3 development and getting the factory for the Model 3, and then the rocket exploding… [pause] … the worst few weeks ever really."

He listed SCTY flak as the first thing on his list of why it's been the "worst few weeks ever really". It probably means Tesla is getting A LOT of flak from A LOT of institutional investors. In other words, sentiment is turning negative toward this deal.

It's all about momentum. Are people/institutions growing more fond of the TSLA/SCTY deal or less fond of the deal? To me, it's quite obvious that sentiment/momentum is turning negative. Tesla still probably has enough votes to push through the merger right now, but voting isn't happening right now. It's happening probably in several weeks (1-2 months?). At that time, will Tesla still have enough votes? I don't know. I personally wouldn't be surprised if the merger happened, and I wouldn't be surprised if the merger didn't happen.

 

[SBenson]

Here's my guess at the odds right now:

55% probability - TSLA acquisition of SCTY goes through.
45% probability - TSLA acquisition of SCTY doesn't go through.

In case that acquisition doesn't go through:
50-75% probability that SCTY declares bankruptcy and stock price goes to 0 within 0-6 months.*

When I see people jumping in on SCTY right now (thinking they're getting a good deal), I can't help but think of GTAT. I'm not saying they're identical... all I'm saying is GTAT pops in my mind.

*Note: price goes to 0 in case of SCTY bankruptcy because all of SCTY assets get divided up among senior debt holders, and common stockholders get stuck with absolutely nothing.

The familiarity with GTAT is due to binary-ness of this event.

SCTY will drop to sub-$5 within two to three trading sessions if the deal doesn't come through. People have to seriously ask themselves how much of their (presumably hard-earned) money they want to put on a binary event. Whatever the odds maybe. Sometimes lower odds play out (like brexit or trump), can you afford the loss, if so how much? Invest in SCTY accordingly.

To make matters worse this TMC is a fan-boy pool. The vibe you get here is that this is a done deal. The reality might be a whole another story.

 

[tander]

Big investors don't pass up on a blatantly obvious 28% arbitrage gains if it's anything remotely close to low risk. Just my opinion on it, I doubt I'll put more than a thousand or so if I do decide to jump in on this play.

Gosh is it really 28%? That's kind of like the market voting that there's a 28% chance the merger won't go through.

 

[dirtyofries]

There's actually a lot of factors going into my guess at those odds, some of which include:

After TSLA's initial offer, there's a lot of information in the filings that show a lot of dismalness to SCTY... like SCTY shopping themselves and not being able to find anyone before TSLA's offer... SCTY's difficulty in raising funds... and the possibility of SCTY not being able to pay its bills (thus bankruptcy) in the event that it can't find ongoing financing.

A lot of this info came out after TSLA's initial offer, and it's starting to change investor's minds about the acquisition.

Tesla's second largest institutional investor is openly expressing doubts about the acquisition.

Elon just last Sunday said the following:
Michael Ballaban – Jalopnik, "Hey Elon, thanks for taking this question. Yesterday you tweeted that it had been an unusually difficult couple of weeks. Was that just a reference to the SpaceX launch pad fire or was there something else going on?

Elon Musk – Tesla CEO, "It’s just been a lot. We are still getting a lot of flak for the whole SolarCity thing which I think is unreasonable and you know, there’s a lot effort on the Autopilot, on the Model 3 development and getting the factory for the Model 3, and then the rocket exploding… [pause] … the worst few weeks ever really."

He listed SCTY flak as the first thing on his list of why it's been the "worst few weeks ever really". It probably means Tesla is getting A LOT of flak from A LOT of institutional investors. In other words, sentiment is turning negative toward this deal.

It's all about momentum. Are people/institutions growing more fond of the TSLA/SCTY deal or less fond of the deal? To me, it's quite obvious that sentiment/momentum is turning negative. Tesla still probably has enough votes to push through the merger right now, but voting isn't happening right now. It's happening probably in several weeks (1-2 months?). At that time, will Tesla still have enough votes? I don't know. I personally wouldn't be surprised if the merger happened, and I wouldn't be surprised if the merger didn't happen.

Thanks for the write-up Dave. I'm not sure I agree, but your position is very understandable and persuasive. Can't argue with it!

 

[DaveT]

With respect Dave, why in the world do you think there is a 45% probability the deal does not go through?

In M&A when both parties want to get the deal done, the vast majority of time it gets done unless there are regulatory roadblocks, but I don't see antitrust concerns or anything of the sort. I see tons of negative articles in the mainstream media that could convince a few smaller retail investors to vote against the will of the CEO and Boards of Directors of both companies, but I don't even think many will. Tesla is buying a ready-made Tesla Energy workforce and possibly the most recognizable US solar brand for a good, mutually agreeable price. There is no hostility of any kind between the companies. The largest shareholders are absolutely for this. Tesla's stock has already taken the hit. Don't you think your odds are a little off?

The big assumption is that "the largest shareholders are absolutely for this". I don't think this is necessarily the case. Minds change all the time. (Note: I think most of the largest shareholders were for it earlier on but later filings showed a lot of what I call the "dismalness of SCTY" and that's changing people's minds.)

If the largest shareholders were truly absolutely for this, then this would cause no stress on Elon as it would be a done deal. But obviously (as evidenced by Elon's own words this past Sunday), it's causing him a lot of stress due to the flak and it shows that there are a lot of significant institutional investors who are against this deal or are becoming increasingly belligerent toward the deal's prospects.

Another factor is look at the SCTY's share price... If TSLA's at $200, SCTY should be at $22 (due to the 0.11 stock swap offer by TSLA). But it's significantly lower. Why? Investors on the Street are well connected and the stock is $17 (and not $22) because of two reasons:
1. SCTY's finances are dismal (and most of that info was disclosed after TSLA's initial offer, thus the drop after).
2. There's a high risk of SCTY bankruptcy if the deal doesn't go through (due to SCTY finances being so dismal).
3. There's a decent chance the deal doesn't go through. If the deal was 99% going through, then there wouldn't be such a large difference ($17 vs $22), as institutions would be buying up SCTY to get a huge discount on TSLA. But big institutions/funds are well-connected and they recognize there's a good chance (ie., 20-50%???) that the deal won't go through.

 

[stealthology]

Customer acquisition costs are the huge cost for SolarCity, and it looks like that is what may be slowing down. Tesla specific synergies may be why nobody else wants them. Didn't they announce drastic cost cutting measures and secure a near term $300m loan to get through the transition?

Above all, I thought Musk said in the merger conference call that he expects SolarCity to be cashflow positive in 6 months. I know Elon can be a little optimistic, but doesn't this mean the merri-go-round of loans can largely stop?

 

[NOLA_Mike]

I'm coming to the conclusion that the SCTY deal depends on what happens with Tesla Q3.

If Tesla has a really good quarter and the stock price goes up I think the deal will more likely go through (everybody is back in "Tesla feel-good" mood and trusts Elon will make it work).

If Tesla has another disappointing quarter I think the deal falls apart.

 

[Oil4AsphaultOnly]

There's actually a lot of factors going into my guess at those odds, some of which include:

After TSLA's initial offer, there's a lot of information in the filings that show a lot of dismalness to SCTY... like SCTY shopping themselves and not being able to find anyone before TSLA's offer... SCTY's difficulty in raising funds... and the possibility of SCTY not being able to pay its bills (thus bankruptcy) in the event that it can't find ongoing financing.

About that. Didn't SCTY recently secure ~$300 million from a George Soros fund?

 

[DaveT]

Customer acquisition costs are the huge cost for SolarCity, and it looks like that is what may be slowing down. Tesla specific synergies may be why nobody else wants them. Didn't they announce drastic cost cutting measures and secure a near term $300m loan to get through the transition?

Above all, I thought Musk said in the merger conference call that he expects SolarCity to be cashflow positive in 6 months. I know Elon can be a little optimistic, but doesn't this mean the merri-go-round of loans can largely stop?

Customer acquisition costs have always been high for SCTY and an expense they've failed to trim. Recent cost cutting won't help with customer acquisition costs. The cost cutting was due to demand being much lower than anticipated.

Also, SCTY was previously forecasting cash flow positive for Q4 (and that's where Elon got his cashflow positive within 6 months after acquisition), but more recently SCTY has abandoned those claims of getting to cash flow positive. They're just trying to stay in business right now.

 

[ggies07]

e listed SCTY flak as the first thing on his list of why it's been the "worst few weeks ever really". It probably means Tesla is getting A LOT of flak from A LOT of institutional investors. In other words, sentiment is turning negative toward this deal.

Dave - I usually agree with everything you put out there, but I'm not sure about this part. I think you are jumping to conclusions here.... Just because he's being asked a lot of questions and is taking up his time does not mean it's turning negative. It could be that Elon gets what he is doing, but it's not that simple for others and therefore it's stressful to him.

 

[DaveT]

About that. Didn't SCTY recently secure ~$300 million from a George Soros fund?

At a very high interest rate, 7.4%. And we don't know the full terms of the financing either. My guess is SCTY had to give an arm and a leg to get that financing... and I don't know how many arms and legs they have left.

 

[eloder]

Customer acquisition costs are the huge cost for SolarCity, and it looks like that is what may be slowing down. Tesla specific synergies may be why nobody else wants them. Didn't they announce drastic cost cutting measures and secure a near term $300m loan to get through the transition?

Above all, I thought Musk said in the merger conference call that he expects SolarCity to be cashflow positive in 6 months. I know Elon can be a little optimistic, but doesn't this mean the merri-go-round of loans can largely stop?

Tesla was supposed to be cashflow positive (temporarily) a while back, but that never happened.

I fully believe in Tesla long term and Tesla as a company, but the stock market heavily emphasizes short-term. When a short-term 20%+ gain isn't being taken advantage of heavily, it's time to take pause.

When I first started investing, I made the same error with a stock that had 12% dividends. I couldn't figure out why people didn't buy the stock up more heavily. Several months later, I learned why (along with money out of my pocket)

 

[FluxCap]

Elon Musk – Tesla CEO, "It’s just been a lot. We are still getting a lot of flak for the whole SolarCity thing which I think is unreasonable and you know, there’s a lot effort on the Autopilot, on the Model 3 development and getting the factory for the Model 3, and then the rocket exploding… [pause] … the worst few weeks ever really."

He listed SCTY flak as the first thing on his list of why it's been the "worst few weeks ever really". It probably means Tesla is getting A LOT of flak from A LOT of institutional investors. In other words, sentiment is turning negative toward this deal.

Now you see - I think that both you and the market read into this statement that the "whom" the "flak" comes from is some nebulous amount of "large institutional investors." I think he predominantly meant the media. With so many major and minor media outlets writing clickbait about SCTY as a complete debt-ridden boondoggle, a massive SpaceX rocket blowing up and taking out an expensive payload, and every news outlet on the planet trying to prove that Autopilot is the devil even though it constantly saves lives, it's easy to see why Elon Musk was down at that moment.

I do not think it is wise to read into any of this that there is nearly a 50% chance of M&A failure here. Media sentiment does not derail M&A. Not even investor sentiment derails M&A unless a majority rebel against management's recommendations, which is often suicidal for all shareholders involved anyway and thus tends to not happen.

I can understand the pressure to sell if you have nervous investors who look to you for advice (I don't know if you have OPM), but I don't think that was the right call, personally. At least I bought a few of your shares so we are keeping it in the family, so to speak.

 

[DaveT]

I'm coming to the conclusion that the SCTY deal depends on what happens with Tesla Q3.

If Tesla has a really good quarter and the stock price goes up I think the deal will more likely go through (everybody is back in "Tesla feel-good" mood and trusts Elon will make it work).

If Tesla has another disappointing quarter I think the deal falls apart.

Sounds reasonable to me.

 

[Papafox]

There are currently 9.81K shares avail to short on IB, and if my memory serves me right, it was over 30K just a couple hours ago and hit a low of 4K. Now it's 9.99K as the market is about to close.

.

Stealthology, thanks for the info. Someone indicated earlier today that IB was out of shares to short, and so I ran with that info. In a way, it's a shame if some short shares are out there right now because I thought today was a lab experiment where we could see how trading takes place when there's absolutely no short-selling.

 

[NOLA_Mike]

Stealthology, thanks for the info. Someone indicated earlier today that IB was out of shares to short, and so I ran with that info. In a way, it's a shame if some short shares are out there right now because I thought today was a lab experiment where we could see how trading takes place when there's absolutely no short-selling.

I'm the one reporting zero earlier and it was zero at that time. Just like it was 9k when @stealthology reported it.

 

[DaveT]

Now you see - I think that both you and the market read into this statement that the "whom" the "flak" comes from is some nebulous amount of "large institutional investors." I think he predominantly meant the media. With so many major and minor media outlets writing clickbait about SCTY as a complete debt-ridden boondoggle, a massive SpaceX rocket blowing up and taking out an expensive payload, and every news outlet on the planet trying to prove that Autopilot is the devil even though it constantly saves lives, it's easy to see why Elon Musk was down at that moment.

I do not think it is wise to read into any of this that there is nearly a 50% chance of M&A failure here. Media sentiment does not derail M&A. Not even investor sentiment derails M&A unless a majority rebel against management's recommendations, which is often suicidal for all shareholders involved anyway and thus tends to not happen.

I can understand the pressure to sell if you have nervous investors who look to you for advice (I don't know if you have OPM), but I don't think that was the right call, personally. At least I bought a few of your shares so we are keeping it in the family, so to speak.

I don't think the "flak" Elon is getting is from the media. The media just writes articles and regarding an acquisition, the media really doesn't matter much. It's the investors and large stakeholders that matter, and those are the people that are giving "flak" to Elon. If it was just one or two of the institutions, I don't think it would bother Elon. But it appears that there is significant resistance among institutional investors to the acquisition. Also, you can look at investor sentiment around this deal by looking at both TSLA and SCTY's stock prices. Both are down since the acquisition process started. And most notably, SCTY is down way below TSLA's offer price. I think some people here think that the merger is obviously going to happen, and think buying SCTY is like buying TSLA at a discount. But that in my opinion is ignoring the fact that institutions are not buying SCTY, even though it's lower than TSLA's offer price, due to high risk... and that risk is the possibility of the merger not going through and SCTY going bankrupt. Sure, that possibility might not be over 50%. Heck, it might not be over 20% (even though I think it is). But, I definitely think it's larger than the 1-5% some are assuming.