Following June's proposal, the merger of kissing-cousins TSLA and SCTY was confirmed in early August. Since then, the market has begun to aggressively price out the probability that the deal goes through as SCTY tumbles relative to SCTY's offer. Even more concerning is the massive bet someone just made that in the options market that the deal will not go through in Q4 as expected.
Remember, two wrongs do not make a right… the market appears to think that the deal will not go through (as SCTY trades well south of TSLA's bid)
And as Axiom Capital Research's Gordon Johnson explains, after Parsing Thru SCTY’s 317pg S-4 Filing, We See Burgeoning Risk to Deal Closure…
317 Page Form S-4 Suggests TSLA Failed To Consider Whether Another Solar Company Was a “Better Fit”. With a number of solar vendors available currently, at arguably depressed prices (the Guggenheim Solar TAN Index is down -30.8% YTD vs. +6.7% for the S&P 500), we blv SCTY’s & TSLA’s joint Form S-4 filing shows TSLA failed to consider if any other solar companies offered more favorable synergies. The evidence? Well, first, following TSLA’s 5/31 board vote approving the SCTY merger offer, Evercore (“EC”) was brought in, & subsequently declared, 6/20, SCTY “the most attractive asset for Tesla in the solar energy industry”, highlighting, at most, ~3 weeks’ of due diligence done. Further, EC didn’t receive SCTY’s financials, including financial results, cash position, & financing needs, until 7/11, or ~3 weeks after it rendered its 6/20 opinion in favor of the merger (before which, as per the S-4, we blv neither TSLA nor EC had access to SCTY’s financial statements, implying it would have been impossible for EC to do a comparable peer analysis). Moreover, while SCTY engaged at least 3 possible counterparties/acquirers in July, ultimately none of them were willing to counter TSLA’s offer. Armed w/ this info, we blv TSLA shareholders are incrementally less inclined to vote yes for this deal before the current 4/30/17 “cutoff date”.
Is Dilutive Yr-End $3bn Equity Offering in the Offing? As detailed in Ex 2., we blv TSLA’s current capital needs are $2.9bn. Thus, while on its 8/1/16 call, TSLA’s CEO implied a “small equity capital raise in the low to mid-single-digits” was “possible” (Ex. 3), $3bn would represent 10% of TSLA’s mkt cap today (Ex. 4 shows TSLA will raise capital this yr). Why do we feel the debt mkts are essentially closed to TSLA? Well: (a) its $1.38bn 2021 convertible bonds are trading at 82.9 cents on the dollar (conversion price = $359.9), (b) its $920mn 2019 convertible bonds are trading at 87.6 cents on the dollar (conversion price = $359.9), & (c) in its C2Q16 10Q, it was revealed that >50% of its $660mn 2018 convertible bond holders prefer early redemption, meaning they are willing to forego the annual 1.5% interest payment, likely due to execution concerns. With these prices implying elevated default risk, we blv incremental TSLA debt would be defined by both high interest & a low equity conversion hurdle, suggesting stock issuance is more likely.
TSLA Already Gave “Bridge” Finance. The S-4 (Ex. 5-6) shows TSLA approved an addtl $75mn in accts payable build by SCTY post the 5/31 board vote (or a de facto bridge loan). When incldg the $100mn in SCTY bonds purchased by Mr. Musk & the Rives 8/23, 2 bridge loans have effectively been extended, contrasting Mr. Musk’s comments 8/1.
50:50 Deal Closes. 50% × $22 (implied deal price today) + 50% × $7 (our price trgt) = risk-adjusted fair value of $14 (-18% downside); SELL.
So perhaps, given all that, this 11,000 lot (1.1 million shares) $10 Put trade expiring in January…
Is not such a crazy idea after all.
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