TSLA Market Action: 2018 Investor Roundtable

[neroden]

That's wrong, the exact opposite is true: taking Tesla private is anti-dilutive, it's a stock repurchase program.

Here is how shares will transfer in the going-private conversion, most likely:

• There's 170m common shares right now
• Shorts have diluted 33m shares into existence by shorting the stock, inflating the total to 203m shares
  
• Private companies cannot be shorted, so shorts are going to buy out 35m shares, reducing the number of shareholders from 203m to 170m
• There's an estimated ~60m shares unable to follow Tesla to a private path, which, assuming the buy-out happened today, the going-private consortium of the Saudis, Silver Lake, Elon and other backers will buy out for $420 or higher
• Those ~60m shares are distributed among members of the going-private consortium, in proportion of their negotiated weight (in proportion of pledged cash looks like a possibility)
  
• End effect: the total number of Tesla shares is reduced from 203m to 170m

Not only is there no dilution, there's an anti-dilutive stock repurchase program. Note that technically private-Tesla could even issue up to 33m shares (or whatever the short interest is when they agree to a deal), and still not dilute shareholders.

This is one of the reasons why valuation of private Tesla is at least ~20% higher than public Tesla.

This is all correct. However...

I will emphasize that the number of shares which will not follow Tesla to a private path is *unknown*. The 60 million estimate is in wild-guess territory. Nobody actually knows. It's actually a very important number, and it's hard to have any idea what it is without surveying shareholders (which I suspect Musk's representatives are doing right now).

 

[neroden]

In my liberal micro bubble, the NYT is the Bible. So it’s taken me a long time to reach your conclusion.

It’s also personally mind blowing to find myself anywhere near Trump’s portrayal of the mainstream media as Fake News. If my friends knew about that heretical line of thinking, I would be permanently voted off the island.

Heh. I think my town is a lot more left-wing than yours. I remember when I started getting most of my news off left-wing blogs, specialty papers, and the Guardian. (Which isn't perfect, but at least it didn't run a campaign promoting the Iraq War lies.) Al-Jazeera is good for anything not involving Qatar (more and more things are indirectly involving Qatar lately, unfortunately). I also remember when I dropped the WSJ for the FT (around when Murdoch bought the WSJ), but since then the FT has gotten less reliable (though it's still worth readin).

 

[Ihateshorts]

Probably more, much more.

Solar City buyout timeline:

• 2016/06/21: merger offer
• 2016/10/12: voting date for 2016/11/18 was announced
• 2016/11/18: shareholder vote that approved the merger

I.e. it took 5 months to get a shareholder vote.

Dell buyout timeline:

• 2013/02/06: Dell buyout offer
• 2013/09/12: Shareholder approval vote
• 2013/10/31: Dell gets delisted and goes private

For Tesla the official buyout offer is enough to squeeeze the biggest short squeeeeezzee ever seen on ws

 

[Fact Checking]

Since Elon seems to be a person of great intellect and somewhat less patience when it comes to suffering fools, I'd say he will very much want to accelerate.

While I'm no expert on this, I picture the buyout as something he might not be able to accelerate: lawyers, accountants, analysts, stakeholders on various levels performing due diligence and signing off on (or objecting to) various versions of the buyout - and a lot of parties to please - and everyone in different time zones.

For example in the Solar City buyout SolarCity advisor Lazard made a 400 million dollars valuation mistake. Fortunately Solar City agreed to not challenge the valuation after the fact - but this could have been a very expensive calculation error for the investment bank. (In that article there's reference to a GS valuation error of $100m, which cost Goldman $30m to settle.)

While Tesla going private is simple in theory, it's still a complex deal:

• The Tesla board has to decide whether the $420 offer is fair to shareholders or not - and they can probably only do that based on valuation. Their decision has to be able to survive legal challenge.
  
• Tesla probably wants to maximize the chances of the deal being accepted by a majority of shareholders. This means they have to negotiate with top shareholders and address various concerns.
• If they are serious about allowing non-institutional investors on board as well they'll have to figure out an investment vehicle that allows a large number of shareholders on board. Even accredited investors are probably limited to 2,000, and they'll have to see whether there's any legal construct that allows them to keep a stake in Tesla, even if indirectly.

All of that needs to be researched, written into memos, signed off on internally, sent to affected parties securely, feedback collected, concerns addressed, decisions made, and repeated a few dozen times.

If Elon can accelerate this, he's truly a genius.

 

[neroden]

While I'm no expert on this, I picture the buyout as something he might not be able to accelerate: lawyers, accountants, analysts, stakeholders on various levels performing due diligence and signing off on (or objecting to) various versions of the buyout - and a lot of parties to please - and everyone in different time zones.

For example in the Solar City buyout SolarCity advisor Lazard made a 400 million dollars valuation mistake. Fortunately Solar City agreed to not challenge the valuation after the fact - but this could have been a very expensive calculation error for the investment bank. (In that article there's reference to a GS valuation error of $100m, which cost Goldman $30m to settle.)

While Tesla going private is simple in theory, it's still a complex deal:

• The Tesla board has to decide whether the $420 offer is fair to shareholders or not - and they can probably only do that based on valuation. Their decision has to be able to survive legal challenge.
  
• Tesla probably wants to maximize the chances of the deal being accepted by a majority of shareholders. This means they have to negotiate with top shareholders and address various concerns.
• If they are serious about allowing non-institutional investors on board as well they'll have to figure out an investment vehicle that allows a large number of shareholders on board. Even accredited investors are probably limited to 2,000, and they'll have to see whether there's any legal construct that allows them to keep a stake in Tesla, even if indirectly.

I've already worked out that there should be no limit on the number of accredited investors or the number of foreign investors. For what Musk actually wants, a "public unlisted company" with restrictions on stock trading seems to do the trick, which eliminates all worries about number of investors. Even if genuinely private for SEC purposes, it looks like the 2000 rule is easily worked around. Promote my tweet please.

Nathanael Nerode on Twitter

There are going to be a lot of IRA investors and 401(k) investors and RRSP investors who are out of luck. I don't know how many shares are held by such plans.

All of that needs to be researched, written into memos, signed off on internally, sent to affected parties securely, feedback collected, concerns addressed, decisions made, and repeated a few dozen times.

If Elon can accelerate this, he's truly a genius.

Yeah, I don't think this can be accelerated.

 

[Fact Checking]

I will emphasize that the number of shares which will not follow Tesla to a private path is *unknown*. The 60 million estimate is in wild-guess territory. Nobody actually knows. It's actually a very important number, and it's hard to have any idea what it is without surveying shareholders (which I suspect Musk's representatives are doing right now).

Agreed, and note that I think the most important attribute of that number is that it's dynamic, not static.

If the deal takes 5-7 months or more, and if the Tesla board and Elon does this right and releases the right kind of information in the right order and on the right schedule, then they have all the levers they need to 'manage' this number and reduce it, if they so wish.

Entities that realize that they don't want to or cannot follow Tesla private will have months to unwind. Entities and people who want to jump on ship will be able to buy in. They could all do that mostly before the deal is actually voted on by shareholders.

The advantage to Tesla and Elon would be that by the time there's a shareholder vote, most of the shareholders will be present because they want to go private.

 

[lklundin]

All of that needs to be researched, written into memos, signed off on internally, sent to affected parties securely, feedback collected, concerns addressed, decisions made, and repeated a few dozen times.

If Elon can accelerate this, he's truly a genius.

OK, but Elon Musk does not to fix this personally. For help with automating the Model 3 production, he went and bought one of the most competent companies in the field, Grohman. Similarly with other competencies - so I expect he will scout out someone among the best for the go-private deal.

 

[sundaymorning]

Yesterday we registered over 2,200 vins 100% dual motor.

Today we registered over 6,800 vins, over 70% dual motors.

Model 3 VINs (@Model3VINs) on Twitter

I say the ramp is going quite well and Elon’s worth ethics are paying off.

Bloomberg thinks we are producing 5,942 Model 3s a week right now. Shorts are going to lose a lot of money end of Q3

 

[Fact Checking]

I've already worked out that there should be no limit on the number of accredited investors or the number of foreign investors. For what Musk actually wants, a "public unlisted company" with restrictions on stock trading seems to do the trick, which eliminates all worries about number of investors.

Interesting option. Tesla would still have to file accurate quarterly GAAP reports, right?

But the quarterly reports wouldn't have nearly as much relevance anymore, as the stock cannot be traded on, analysts wouldn't have targets, etc. etc.

Would hedge funds and mutual funds be allowed to invest into Tesla, or would they still be subject to the 25% limit? I.e. could a mutual fund be created which would allow non-accredited investors to (indirectly) own Tesla shares as well?

 

[Matias]

OK, but Elon Musk does not to fix this personally. For help with automating the Model 3 production, he went and bought one of the most competent companies in the field, Grohman. Similarly with other competencies - so I expect he will scout out someone among the best for the go-private deal.

Parties will do their own due diligence. You can’t push it.

 

[neroden]

Interesting option. Tesla would still have to file accurate quarterly GAAP reports, right?

But the quarterly reports wouldn't have nearly as much relevance anymore, as the stock cannot be traded on, analysts wouldn't have targets, etc. etc.

Exactly. Put a legend on each share of stock saying that it can only be traded with permission of the company (we'd all vote on that) and stock trading would end.

Would hedge funds and mutual funds be allowed to invest into Tesla, or would they still be subject to the 25% limit? I.e. could a mutual fund be created which would allow non-accredited investors to (indirectly) own Tesla shares as well?

It's interesting to look into this.

From what I can tell, and I may be wrong, non-accredited investors could just plain own shares (since the company would be meeting reporting requirements).

However, the stock would be treated as private equity for purposes of IRA, 401(k), RRSP, mutual fund and hedge fund allocation rules, etc. because it would be non-tradeable and unlisted. Canadian RRSP's can't hold unlisted US shares, for example.

So I think it would allow most people to retain their TSLA shares but some retirement accounts and funds with limits on private equity investments would not be allowed to.

 

[Johan]

This is all correct. However...

I will emphasize that the number of shares which will not follow Tesla to a private path is *unknown*. The 60 million estimate is in wild-guess territory. Nobody actually knows. It's actually a very important number, and it's hard to have any idea what it is without surveying shareholders (which I suspect Musk's representatives are doing right now).

Just a note on this, which could be nothing or could be something, that I will try to follow up next week: while working last Thursday I got a call on my cell phone from a number I didn't have stored. I wasn't able to answer then and there so the call went unanswered. I tried calling back but no answer. This weekend I checked in the directory who the number was listed with, it was a person I don't know who is. I looked up where she lives and got a hit on an adress where there were also other family members listed. Her apparent husband was listed so I googled his name. Turns out he's an attorney specializing in Mergers and Aquisitions with a big Norwegian law firm... Now this could all just be some strange coincidence but I think stock ownership with Norwegian brokers/banks is public information so just maybe could be someone trying to reach out to stock owners..? Anyway, will see if I can find out more next week.

 

[lunitiks]

Which law firm?

 

[bdy0627]

Probably more, much more.

Solar City buyout timeline:

• 2016/06/21: merger offer
• 2016/10/12: voting date for 2016/11/18 was announced
• 2016/11/18: shareholder vote that approved the merger

I.e. it took 5 months to get a shareholder vote.

Dell buyout timeline:

• 2013/02/06: Dell buyout offer
• 2013/09/12: Shareholder approval vote
• 2013/10/31: Dell gets delisted and goes private

It took about 7 months to get a shareholder vote.

Also note that the Dell buyout was preceded by months of private negotiations, before they went public with the Dell board's approval of the deal. The first moves in the Dell buyout were done in the summer of 2013. By that timeline it took a year to perform the private buyout.

So I'd expect 5-7 months at minimum - it could easily drag into 2019, unless Elon wants to really accelerate the deal.

I'm clueless about how this buyout process is likely to be communicated to shareholders. Assuming the entire buyout process takes about a year, how long would you guess it will take until more solid information about the buyout is released from Elon to the public? Is the thinking that we aren't likely to hear much of anything until Elon finishes putting it all together and then presents his buyout proposal to the Board? Are we even likely to hear about that? It seems hard to fathom that we may not hear anything further for 5+ months at this point. Ben Kallo had expressed on an interview last week that he was hopeful of hearing a lot more detail about the potential buyout within about 10 days. Does that seem realistic? Hearing the opinions here, I'm thinking it's not.

 

[lunitiks]

Speaking of law firms... Now this:

https://www.marketwatch.com/amp/story/guid/b5bb6fd0-9df4-4e49-ab26-cf2530a5e1ce

SHAREHOLDER ACTION ALERT: The Schall Law Firm Announces the Filing of a Class Action Lawsuit Against Tesla, Inc. and Encourages Investors with Losses in Excess of $750,000 to Contact the Firm

 

[neroden]

Speaking of law firms... Now this:

https://www.marketwatch.com/amp/story/guid/b5bb6fd0-9df4-4e49-ab26-cf2530a5e1ce

Typical nothingburger. I've mentioned already how long this sort of case takes to resolve (10 years is typical), and the normal case involves a pharmaceutical company concealing material information about a major drug for *months*. They have to find people who bought in a *three day period*, and based on the number they're waving around, who bought *10,000 shares minimum*, *and* who feel aggrieved...

 

[madodel]

Which law firm?

Dewey, Cheatem and Howe

 

[RobStark]

Just pointing out $25k in India is not the sweet spot it is in the US.

Does that need pointing out?

Does any investor here believe the average wage, median wage, and distribution of wages in general in India are similar to the US?

 

[lunitiks]

Saudis going after Lucid Motors instead?

Exclusive: Saudi PIF in talks to invest in aspiring Tesla rival Lucid - sources

 

[Sancho]

Saudis going after Lucid Motors instead?

Exclusive: Saudi PIF in talks to invest in aspiring Tesla rival Lucid - sources

My FUD radar just went to 11.