Saudi Arabia slashes exposure to Tesla

Saudi Arabia's sovereign fund has cut its exposure to Tesla Inc via a hedging deal with J. P. Morgan bankers in a bid to protect against a stock price drop. The Saudis' Public Investment Fund still holds shares but froze its $2.9 billion investment on the company.

Background

The Public Investment Fund (PIF) is a sovereign wealth fund owned by Saudi Arabia, founded for the purpose of investing funds on behalf of the Government. According to Saudi Arabian Vision 2030, it plans to wean off the country from its dependence on oil, diversify the economy and develop new income streams from trade, tourism, infrastructure projects and public services like health care and education. For this, Saudi Arabia’s sovereign fund, known as Public Investment Fund regularly invests in ideas, especially technology. 

Beginning in 2015 the PIF began making a number of high-profile investments, including acquiring a 38 per cent stake in South Korea’s Posco Engineering & Construction Co. and establishing a sizeable fund with French firms in October 2015. In June 2016, it was announced that the PIF was acquiring an approximate 5 per cent stake in Uber for an investment of $3.5 billion, the largest ever single investment. On 14 October 2016 Japan's SoftBank announced it had signed a memorandum of understanding with the PIF for the establishment of a London-based SoftBank Vision Fund which aims to invest up to $45 billion over five years in the tech sector. PIF’s main objective is to improve the Saudi economy and job opportunities.

In August 2018, Tesla CEO, Elon Musk announced that he was considering taking automotive and energy company Tesla private. He tweeted that he secured funding to take Tesla private at $420 per share explaining that Saudi Arabia would back the buyout. Saudi Arabia denied it and Musk was charged by the Securities and Exchange Commission for ‘false and misleading’ remarks. The SEC fined Tesla and Musk separately for $20 million each in the debacle. Musk paid a personal fine of $20 million and agreed to step down as chairman of the company.

Analysis 

Saudi Arabia has taken an insurance policy on its investment in Tesla, which cuts its net exposure to the stock. The country’s Public Investment Fund hedged most of its 4.9 per cent stake in Tesla with the help of bankers at JPMorgan Chase after the market closed on January 17th. 

Saudi Arabia slashed its exposure less than four months after chief Elon Musk settled fraud charges over his claim that the kingdom was ready to back a management buyout. After it denied the buyout, Saudi Arabia invested in Tesla’s rival company called Lucid Motors with $1 billion in funding from sovereign wealth. In a critical research report, JPMorgan analyst Ryan Brinkman wrote that it's "premature" to value Tesla based on a go-private deal that may or may not ever happen.

The hedging arrangement meant that, although it still holds the shares, the PIF was left with little exposure if the stock price falls. Its potential gains are also capped if the stock rises, freezing its $2.9 billion bet on the company. The state fund is overseen by Crown Prince Mohammed Bin Salman.  The PIF had built a 4.9 per cent stake, making it one of Tesla’s top-five shareholders. The derivative used to put on the hedge is known as an equity collar, which are bespoke instruments that are costly to finance and have become popular with Middle Eastern and Asian investors. 

Tesla announced that it was cutting 7 per cent of its workforce and warned of ‘very difficult times’ on January 18th. Following this announcement, the Tesla stock fell. On the day of Saudi Arabia’s hedge, Tesla shares closed at $347.26, valuing its shares at $2.9 billion. The stock price has since fallen more than 16 per cent. 

Chief Executive Elon Musk said in emailed comments that "To the best of my knowledge, there has been no communication with PIF for months. I thought they had probably sold their shares. We don't know if they own any at all." 

Assessment

Our assessment is that the Saudi Arabia hedging was well timed. It can be noted that there was no communication between Musk and PIF before Tesla’s layoff announcement and therefore it is not likely a guided step. It is likely that the stocks were frozen due to Tesla’s volatile stock pattern.