Trading in Tesla suspended after Elon Musk tweets plan to go private

Regulators step in after bombshell announcement sent shares up 7 per cent

PUBLISHED : Wednesday, 08 August, 2018, 3:42am
UPDATED : Wednesday, 08 August, 2018, 10:37am

Tesla Inc shares jumped more than 7 per cent on Tuesday after Chief Executive Elon Musk said on Twitter he is considering taking the electric car maker private at US$420 per share as it goes through a period of rapid growth and financial constraints.

The bombshell proposal to take the electric car maker private prompted regulators to take the unusual step early Tuesday afternoon of suspending trading in the company’s stock.

The disclosure initially raised questions whether the eccentric Musk was joking, but he then amplified on his plan in a subsequent tweet that said he intended to create a special fund that would allow all current Tesla shareholders to retain a stake in the car maker if they want.

Such a deal, if it went ahead, would take Tesla out of the glare of Wall Street but might limit its access to capital. It would be one of the biggest go-private deals on record with a price tag of about US$72 billion, based on US$420 per share.

That price would represent a 22.8 per cent premium to Tesla’s closing price on Monday.

When another person tweeted that going private “saves a lot of headaches,” Musk replied, “Yes”.

Musk also tweeted he would remain CEO of the electric carmaker even if it ceases to be publicly traded.

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The US Securities and Exchange Commission allows companies to use social media outlets like Facebook and Twitter to announce key information in compliance with its fair disclosure rules so long as investors have been alerted about which social media outlets will be used to disseminate such information.

The SEC did not immediately respond to a request for comment on Musk’s tweet.

Tesla’s shares jumped as high as US$371.15 in afternoon trading before trading was halted.

The company had a market value of US$58 billion as of Monday’s close. Musk owns nearly 20 per cent of the company.

Musk has been under intense pressure this year to prove he can deliver on his promise to turn his money-losing company into a profitable higher-volume manufacturer, a goal that has propped up Tesla shares and resulted in a market value higher than that of General Motors Co.

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Going private is one way to avoid the intense scrutiny of public markets. Musk has had feuds with regulators, critics and reporters, and questions remain about Tesla’s production and manufacturing difficulties, long-term demand for its cars and uncertainty over funding.

“My hope is all current investors remain with Tesla even if we’re private,” Musk tweeted. “Would create special purpose fund enabling anyone to stay with Tesla. Already do this with Fidelity’s SpaceX investment.”

Analysts took Musk at his word.

“I believe Tesla considers Tweets as public disclosure. I think he’s serious. Plus this is short squeeze rocket fuel after a nice quarter,” said analyst Chaim Siegel from Elazar advisers.

A short squeeze is a trading scenario that occurs from time to time in heavily shorted stocks, when bearish traders are forced to buy shares to avoid big losses – something that ends up pushing the stock only higher.

Short interest in Tesla on Monday stood at nearly US$12 billion, equivalent to 28 per cent of its float, according to S3 Partners, a financial analytics firm.

George Galliers of Evercore ISI said he believed the tweet was serious.

“I can’t believe this is something to bluff or make fun of. Given his historic frustration with short sellers, analysts and certain parts of the press, it is perhaps also not surprising that he has given consideration to taking the company private,” Galliers said.

“Details, structure, participants and how the valuation has been determined remain to be seen.”

Earlier in the day, the Financial Times reported that Saudi Arabia’s sovereign wealth fund, overseen by Crown Prince Mohammed bin Salman, has built an undisclosed stake of between 3 and 5 per cent stake in Tesla.

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Call options, which convey the right to buy shares at a fixed price in the future, were particularly busy and logged significant price gains on the day after the report.

For example, one block of 714 Tesla call options, betting on the shares rising above US$365 by the end of the week, were bought for 85 cents, for a total outlay of US$60,690 on Tuesday.

On paper, their value jumped to US$790,398 in less than an hour.