Saudi Sovereign Wealth Fund Shows “No Interest” In Tesla LBO

In the aftermath of Elon Musk’s shocking announcement that he was contemplating a $72 billion LBO for Tesla with “funding” allegedly “secured” from investors, investors promptly concluded that there is only a handful of names that could bankroll such as massive transaction. The first name cited was that of Japan’s SoftBank, which thanks to its $100bn Vision Fund, has been linked to most tech deals.

However that speculation was promptly put to bed last week when the FT reported that even when the stock was trading around $300/share, “people close to SoftBank tell the FT that the fund considers Tesla to be overvalued and there are no indications it wants to invest.”

Meanwhile, Bloomberg reported that Soft Bank head Masayoshi Son and Musk had met in April 2017 to discuss an investment in Tesla, and while the talks touched on taking Tesla private, they “failed to progress due to disagreements over ownership. Musk proposed a structure that would have given him disproportionate control over the company through stock with super-voting rights”, a similar outcome to the structure he has proposed publicly, even if it still remains unclear just what Musk hopes to achieve beside cutting the “liquidity”, i.e., buying and selling period to every six months. Bloomberg also reported that “there are no active talks between the companies now.”

And with Soft Bank gone, only one potential anchor investor remained: the one that started last week’s Tesla surge in the first place, the Saudi Arabian Sovereign Wealth Fund, which as the FT reported less than an hour before Elon Musk tweeted his LBO proposal, had purchased a stake just below 5% in TSLA shares in the open market (but not directly from the company), sparking speculation that it may be interested in acquiring the entire company.

However, as Reuters reports on Saturday, these hopes were also crushed because according to two sources familiar with the matter, “Saudi Arabia’s Public Investment Fund (PIF) has shown no interest so far in financing Tesla CEO Elon Musk’s proposed $72 billion deal to take the U.S. electric car maker private, despite acquiring a minority stake in the company this year.”

Investors and analysts viewed PIF as a natural financing partner. Beyond amassing a stake of just below 5 percent in Tesla, the sovereign wealth fund has poured tens of billions of dollars into technology investments, including $45 billion in SoftBank Group Corp’s Vision Fund over five years.

However, citing a source who is familiar with PIF’s strategy, Reuters also adds that the PIF “was not currently getting involved in any funding process for Tesla’s take-private deal.” Separately, “a second source close to the situation said PIF was not taking part in any such plan at this stage.”

This source said that the Saudi fund would not make an investment of this kind without seeking guidance first from Softbank.

And as we already learned previously, SoftBank is not currently pursuing a deal for Tesla given its investment earlier this year in rival GM Cruise, and its consideration that Tesla was already “overvalued” at lower stock prices.

There is another reason why the Saudis would be reluctant to bankroll such a massive deal: they have financial problems of their own with the FT reporting last Thursday that the “Saudi sovereign wealth fund scrambles for resources” as “Riyadh is taking radical steps to bolster the investment vehicle’s coffers.”

Riyadh is now taking radical steps to boost the fund’s coffers. The Royal Court instructed Saudi Aramco to acquire the fund’s 70 per cent stake in Saudi petrochemicals maker Sabic, potentially raising $70bn for the PIF, three people familiar with the matter said.

As the kingdom delays the Saudi Aramco privatisation indefinitely, these people said, the transfer of funds from one state coffer to another allows the PIF to raise cash quickly at a time when finance ministry handouts have diminished and its big-ticket investments are yet to yield returns.

PIF’s reluctance to invest, Reuters concludes “will add to the pressure on Musk to produce details of his financing plan.”

That may be a problem, because as of late last week, Tesla’s board had not yet received a detailed financing plan from Musk and was seeking more information, while Bloomberg reported at the same time that Tesla is only now canvassing investor and bank interest for the massive transaction.

The board will make a decision on whether to hire advisers and launch a formal review of Musk’s take-private proposal in the coming days, based on how much detail on the financing plan it receives from Musk, a third source said.

Of course, all this assumes that Musk actually had a “financing plan” and had obtained “secured funding”, a possibility that grows remote by the day, and is also why the SEC contacted Tesla to ask about Musk’s assertion on Twitter that funding for his proposed deal was “secured”, the WSJ reported, and has resulted in at least two class-action lawsuits filed by shorts who alleged that Musk engaged in fraud and market manipulation to “burn the shorts” without actually having a credible going private plan in hand.

Meanwhile, Reuters further notes that investment bankers and analysts have so far reacted with scepticism, “telling Reuters it would be hard for Musk, whose net worth is pegged by Forbes at $22 billion, to raise the equity and debt financing needed for the deal given Tesla is not turning a profit.”

Some analysts have suggested that Musk could convince Tesla’s top shareholders, such as Fidelity Investments and China’s Tencent, to roll their equity stakes into the deal, thereby significantly reducing the amount of money needed to be raised.

However, such a deal structure would come with big logistical and legal challenges when it comes to buying out smaller shareholders, analysts warned, even as large investors stand to gain little – aside from drowning out the noise created by shorts – while limiting their ability to exit the investment at a moment’s notice.

Which then begs the question: why push for such a deal in the first place, if not simply to burn the shorts? Some have speculated that it could be merely a smokescreen to distract from other problems facing the company (while pushing the stock price higher), bringing up the following blast from the past that was circulating just two months before Lehman filed for bankruptcy:

Source: @capital_walker

The good news, now that litigation is involved and a discovery process appears imminent, coupled with the SEC’s own investigation, is that an answer will be forthcoming relatively soon.

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