TSLA Market Action: 2018 Investor Roundtable

[neroden]

Again, no. Any institutional investors who can't take part in a private Tesla have an effectively limitless amount of shares that they need to get rid of.

The big open question is, of course, *who* can't take part in a private Tesla. How many shares. That's the really big, unresolved question. I have heard nothing but wild guesses.

If it wasn't for investors that have to liquidate, I'd agree that it could go well over $420. But because they exist, and because they surely well outnumber shorts that need to cover, I can't envision this massively-over-$420 short squeeze that some here are envisioning.

 

[gwright]

Which is why it would suck bigtime to be forced into one of those. I'm trying to invest in Tesla, not into 15% Tesla and 85% some other random crap.

I would consider that a forced sale.

I think the alternative mutual fund could have one stock, if the manager was willing to structure it that way. It would not work like regular mutual funds with daily prices, diversification, etc. It could even limit liquidation events to correspond to TSLAP. But it would aggregate current individual shareholders into a large group that is a single shareholder. This type of fund would not have much appeal to the typical mutual fund investor because it is not diversified. But it could be an SPV to accomplish Elon's stated objective. And it might not need to be limited to accredited investors - what I read on the SEC site suggests that it would not require accredited status.

Fidelity, under normal circumstances, probably would not have much interest in that. Doesn't appeal to their target investors who are looking for diversification. But it would require little management (nothing to manage, really) and would allow them to stay in the game as the stock appreciates and is ultimately re-listed. Honestly out of my depth on this theory, but I don't know why that wouldn't be an option.

 

[Fact Checking]

BTW., there's one thing I noticed, there's a large and significant asymmetry between TSLA share trading behavior and market action between Dell's all-cash buyout of all shareholders in 2013, and Elon's transfer deal to take Tesla private, and that the behavior of the share price will depend on a handful of key details of the buyout deal.

Firstly, note the Dell timeline and market action:

• 2013/09/12: Preliminary shareholder vote approves deal
• 2013/10/31: Dell was delisted from the NASDAQ
• all shareholders were bought out for $13.75 per share

It was possible to hold a shareholder vote, continue trading Dell on the NASDAQ for 6 more weeks and then and then de-list from the NASDAQ - because there was no real incentive for the price to go above the $13.75 cash settlement price. Shareholders not interested in voting could trade shares before, during and after the vote. As a result trading in Dell was mostly flat, and mostly below the guaranteed minimum price.

With Elon's transfer deal for Tesla this process results in the share price reaching the expected value of the private shares of Tesla, right after shareholder vote approval.

Note the very different price dynamics compared to the Dell buyout:

• Every investor who is not a shareholder yet but likes the idea of a private Tesla would buy TSLA shares up to the price levels they think the private shares are worth, up to the date of delisting. Their behavior soaks up liquidity and adds buying pressure.
  
• Every existing shareholder who thinks that the current price levels for the private shares are worth more than the expected return from a private Tesla will sell to these new shareholders. I.e. their behavior adds liquidity but adds no selling pressure, because the buying pressure from new investors is price level sensitive.
  
• A price drop will not cause new shareholders to sell - they already valued their private shares, bought their stake already, and know that they are getting a stake in Tesla. They are largely price insensitive to price movements down. I.e. their behavior removes liquidity from lower price levels.
• A purchase below and slightly above $420 price levels is effectively a risk-free speculative position: a private shares are guaranteed for all shareholders when the stock delists - depending on the exact structure of the transfer deal. For example

If you look at the equilibrium model of the above patterns of market behavior then all the forces are pointing towards higher and higher TSLA prices, up to the last few day of of trading perhaps when opportunistic traders who were expecting this behavior would sell their stakes.

Also note that volatility of this period will largely depend on just a handful of parameters of the transfer deal:

• There will be a final deadline for the $420 cash buyout:
  • If it's set to the shareholder vote date then all new shareholders at the date of delisting will get private shares, no new shareholders get a $420 cash deal. This means that there is no $420 price guarantee and the NASDAQ TSLA price could drop below $420.
  • If it's at the date of delisting then a way to implement it would be for the buyout consortium to place a (real!) BUY LIMIT order of 170,000,000 shares at $420, which guarantees a $420 price for every shareholder who wants to sell. Anyone selling at that level means those shares would go directly to the buyout consortium and be removed from the float. This would reduce volatility and would further create upwards pressure for the price. This way any shareholder who wants to cash out can sell either to other investors, or to the buyout consortium (which offers the lowest price).

What do you guys think, how will these details of the transfer deal be structured and what will be the resulting market action?

 

[neroden]

Yes, around 1/5th of the shares are short.

Meanwhile, the only party who we can reliably say won't be selling any is Musk, who only owns 1/5th of the company. 4/5ths of the company's ownership is comprised of entities that either A) may want to sell, or B) may be forced to sell. That's pretty darned optimistic to assume that 80% of the ownership will both A) want stay in at a price of $420, and B) be capable of staying in.

I believe we can reliably say Tencent won't be selling.

More news. Bailie Gifford's manager, James Anderson, thinks the $420 is a LOWBALL bid.

Also, Bailie Gifford's largest client, Scottish Mortgage, could keep their stock, but he's worried their other clients couldn't.

Baillie Gifford's Anderson questions Musk's Tesla valuation

There is a SERIOUS chance of a no vote, guys. If Musk doesn't figure out how to let Bailie Gifford's other clients keep their stock, James Anderson could well oppose the deal. Similar things will happen at Fidelity.

 

[Scuttlebutt]

This is a very complicated trade. There is no certainty that after selling common shares in a squeeze that the price of private shares will ever be lower than what you sold for. The safer way to avoid that trade loss is simply to hold shares through and convert them into private shares 1 to 1.

Let's be clear here that private shares are worth more than common shares due to lower volatility and not dilution via shorting. Moreover Tesla value is growing especially fast now.. if you sell at one point to buy back in 6 months late, the underlying value of Tesla has substantially increased, short of volatility and shorting dilution effects.

Very good points to consider. Thank you jhm.

 

[neroden]

Is it possible to have one of the investors in a private Tesla be a public company with no other business activities, just its ownership in Tesla - such that retail investors could continue on as shareholders in said public company?

I think so -- see Altaba.

And if it's even possible, wouldn't the liquidity of that company's shares be the very thing Tesla is trying to avoid?

Yes, it would be. Short-selling, options, the lot! So that's why that doesn't make much sense.

 

[KarenRei]

I think so -- see Altaba.


Yes, it would be. Short-selling, options, the lot! So that's why that doesn't make much sense.

What about an unlisted public company? It wouldn't make short selling impossible, but it'd have to be private transactions... aka a lot more difficult.

 

[EinSV]

Tesla private equity could be "the holy grail of investing" - high expected return with low volatility/risk

This is a very good point. SpaceX and Tesla have enjoyed similar returns over long time horizons but SpaceX has been much less volatile, steadily doubling every three years or so while TSLA has been a wild ride (which would likely continue for a while if it remained public).

 

[immunogold]

If you want more shares, why aren't you buying now when they're $352 each? Why are you waiting for $420 or more?

I have more than doubled my TSLA position this week.

 

[brian45011]

but i thought that convert holders can convert directly with agent at pre-defined times every quarter, until dec 1 2018 at which point dtcc window is open for conversion and the conversion rate is then static for all converts.

You may be thinking about the provision that says if the shares trade above a certain price during the last 20 out of 30 trading days in a quarter, the notes can be converted to shares during the following quarter.

For 2019 & 2021 notes that level is $467.83

For 2022 notes that level is $425.75

The free conversion periods begin three months before maturity.

 

[Boomer19]

You may be thinking about the provision that says if the shares trade above a certain price during the last 20 out of 30 trading days in a quarter, the notes can be converted to shares during the following quarter.

For 2019 & 2021 notes that level is $467.83

For 2022 notes that level is $425.75

The free conversion periods begin three months before maturity.

ahh, yes. thank you!

 

[neroden]

What about an unlisted public company? It wouldn't make short selling impossible, but it'd have to be private transactions... aka a lot more difficult.

That could be done but would bring back the accredited investor issue. If you issued stock in a *new* unlisted public company -- as opposed to the *already existing* Tesla -- you couldn't issue it to non-accredited investors! (Because you'd be "offering" it to them.) So all the non-accredited investors would be forced out.

OK, that seems to be wrong. It looks like maybe non-accredited investors *can* be offered shares in an illiquid, non-traded public company? I'm not sure? Does anyone know the rules?

 

[Reciprocity]

I believe we can reliably say Tencent won't be selling.

More news. Bailie Gifford's manager, James Anderson, thinks the $420 is a LOWBALL bid.

Also, Bailie Gifford's largest client, Scottish Mortgage, could keep their stock, but he's worried their other clients couldn't.

Baillie Gifford's Anderson questions Musk's Tesla valuation

There is a SERIOUS chance of a no vote, guys. If Musk doesn't figure out how to let Bailie Gifford's other clients keep their stock, James Anderson could well oppose the deal. Similar things will happen at Fidelity.

God I hope so.. But im surprised. Why would investors that are going to stay vote no. Most are staying, they dont care what the buyout price is. Its meaningless to those that stay. Its only important to those that are forced to sell. Maybe Fidelity and TRow have enough shares to vote that they can cause a problem. But I doubt it. In total, institutional investors do own enough shares to vote it down, but man are going to stay in the private company, so its hard to know how they will go. Any ideas now index funds that own the shares would leverage their rights? Do they have any? I would think they would want a fair evaluation so they would poo poo the deal as well. I honestly have no idea.

 

[Unpilot]

That could be done but would bring back the accredited investor issue. If you issued stock in a *new* unlisted public company -- as opposed to the *already existing* Tesla -- you couldn't issue it to non-accredited investors! (Because you'd be "offering" it to them.) So all the non-accredited investors would be forced out.

That would be me

 

[ValueAnalyst]

Who says they aren't?

The stock price. If there was a surge of new investors looking to get in "TSLAP," then why is the price still at $360?

Also, the short interest seems to be stable this week, so the SP drop must be due to some longs selling out, agreed?

 

[winfield100]

15% Tesla... 15% SpaceX... 15% Boring Company.... hmm, what else could we add in?

Come on, Musk, start up 4 more major interesting for-profit companies We all know you want to make an electric airplane - make the next Boeing! Where's your company to drive Maersk out of the market with electric cargo ships? How far is Neuralink from a commercial product... speed that one up! Violate your signed oath and have OpenAI help build the Pentagon some killbots! Come on, we need things to invest in!

15% Tesla... 15% SpaceX... 15% Boring Company.... hmm, what else could we add in?
Mars Colony, 55%, very illiquid shares, only trade once every 26 months when mars is at ?opposition? and Mars colony only traded/converted for trip tickets on BFR (or neural lace) Mars Opposition | Mars Exploration Program

 

[SebastianR]

Who says they aren't?

In fact, I think this amplifies the problem for the shorts: Anybody who is willing to pay 420 will happily pay today's prices. Whoever is short today will need to know that with every passing hour more longs are going to be "strong longs" i.e. be willing to go private with Tesla.

With regards to the current price action, I think what we see is that those institutions that can't go private, are slowly getting out of the stock these days (even if that doesn't really make sense, since folks could just sell at 420). I seem to remember that we saw similar trading / movement in the stock ownership in the SolarCity days. At the end of the process all institutions were behind the merger, but a few did unload a few shares in the process...

 

[Boomer19]

I think so -- see Altaba.


Yes, it would be. Short-selling, options, the lot! So that's why that doesn't make much sense.

the thing is, the altaba was a reverse morris trust tax workaround.

in reading the requirements to be able to execute. RMT, i’m not sure tesla can do so

Reverse Morris Trust - Wikipedia
they’d have to meet these irs requirements
Internal Revenue Code section 355 - Wikipedia

from the irs part 3
this is the section i think may nullify their ability to do this
3) According to §355(a)(1)(c), both the distributing corporation and the controlled corporation must be engaged immediately after the distribution in an actively conducted trade or business which as been so conducted throughout the five-year period ending on the date of the distribution. That business must also not have been acquired within the five-year predistribution period in a taxable transaction

but i’m not expert in this area

 

[lklundin]

There is a SERIOUS chance of a no vote, guys. If Musk doesn't figure out how to let Bailie Gifford's other clients keep their stock, James Anderson could well oppose the deal. Similar things will happen at Fidelity.

Would there still be a vote, then?

And if so, to what extent would that lead to the recall of shorted shares?

 

[mongo]

The stock price. If there was a surge of new investors looking to get in "TSLAP," then why is the price still at $360?

Also, the short interest seems to be stable this week, so the SP drop must be due to some longs selling out, agreed?

>41 million shares traded the last 2 days and the price moved ~$18 (which put it back where it was earlier this week) so that shows buying support, even if some longs got out.

Shorts selling to shorts keeps the interest constant while boosting volume.