Unravelling the complex case of Saudi Arabia, Elon Musk and Tesla
When announced planning private, Elon Saudi to Musk he take Arabia’s was Tesla Public Investment Fund was thrust into the limelight as the main candidate to drive the electric carmaker into a new era. With privatisation plans NOW Off THE TABLE, WE investi
IN WHAT BECAME one of the most intriguing and beguiling business stories of recent years, Saudi Arabia emerged as a leading player in the complex – and now defunct – privatisation plans of electric carmaker Tesla.
What started with a Tweet on August 7 by Tesla CEO Elon Musk developed into a saga of bamboozling proportions. From Saudi Arabia’s potential involvement, to Donald Trump’s crackdown on foreign investments, the road was a bumpy one before Musk applied the brakes on August 25, announcing that privatisation plans had been brought to an end.
Musk’s now infamous Tweet at the start of the month told the world: “Am considering taking Tesla private at $420. Funding secured.”
This implicated Saudi Arabia’s Public Investment Fund as a main financer, as the CEO had been meeting with PIF – Saudi Arabia’s sovereign wealth fund – since 2017. In July this year PIF bought a 5 per cent stake in Tesla through the public markets. Musk also revealed this year that the fund’s managing director told him that he regretted not helping the carmaker go private sooner and “strongly expressed his support for funding” such a move.
In later comments, Musk revealed that he understood this to mean no other players were needed, and that there was “no question” a deal with the fund could be reached.
On August 2, Musk told the Tesla board that he wanted to take the company private at $420 a share – a 20 per cent premium to where the shares closed for the day. Five days later, the Financial Times reported that the PIF had built a $2bn stake in Tesla, and in less than an hour, Musk sent his Tweet.
His subsequent messages suggested he wouldn’t have a controlling vote in Tesla, wouldn’t expect any shareholder to, and wouldn't be selling any stock. He also hoped that all current investors remained with Tesla; would limit liquidity events to every six months or so; and wouldn’t force any shareholders to sell. But despite the caveats the fall-out was immediate
Six of Tesla’s nine directors issued a brief statement that the board had discussed how going private could “better serve Tesla’s long-term interests”, addressed the funding for this to happen, and “taking the appropriate next steps to evaluate this”. Shares dropped below where they were pre-Tweet, the US Securities and Exchange Commission were reported to be gathering information about Musk’s declarations, and shareholder complaints were filed as securities-fraud class action.
This was merely the tip of the iceberg, and of course, Saudi Arabia was in the middle of things.
Unravelling PIF’s involvement
Saudi Arabia's interest in Tesla can be explained quite simply through its Vision 2030 plans to diversify away from oil.
As part of this vision, the kingdom aims to become a global investment powerhouse, giving the PIF a central role in its ambitious future plans. The vision's Public Investment Fund Programme has been described as the engine behind economic diversity in the kingdom, with plans to become one of the largest SWFs in the world by building assets of more than $2 trillion by 2030.
As such, Tesla is good fit. Not only is the company extremely high profile, but also it would be symbolic for Saudi Arabia in its move away from fossil fuels. Tech has also been a key focus for the fund, with multi-billion dollar investments with Japan's SoftBank Group, new megacity Neom, an SME fund, Uber Magic Leap, Noon.com, and others. So a deal with Tesla made sense on this front too.
The business element for the kingdom would also lie in its move away from fossil fuels. As it reduces the role of oil, electric vehicles must surely become more prevalent, meaning cars such as Tesla's could see a large uplift in sales – especially if Musk's plan to build a $25,000 EV within three years comes to fruition.
But appeal and desire aside, how serious was the PIF's interest in Tesla?
For a start, Musk never expected the PIF to buy out all Tesla shareholders single-handedly – a move that would cost about $72bn. Instead, he expected twothirds of shareholders to stay with the company and roll over to the private Tesla. So Saudi Arabia would never have bought out the firm, rather being one private shareholder among several. The influence PIF and Saudi Arabia would have had on the company, therefore, would not have be total. Substantial, perhaps – depending on the size of their stake – but far from the ownership that some headlines had suggested.
The case against
The list of complications surrounding a potential deal was long, taking in financial concerns on both sides, the role of Musk himself, US regulations and a rival to Tesla.
The PIF is already committed to a number of high profile, high- price investments. $ 45bn has been put towards SoftBank, with $ 3.5bn going into Uber Technologies and $ 1bn into Virgin Group
Looking more closely at Tesla’s financials, there is an estimated $11bn debt pile and negative cash flow, with bonds rated as ‘junk’ by credit agencies, and the company burning through $3.4bn last year – followed by an expected $2.5bn this year. Not immediately appealing to any interested party, though the long-term potential of the company might have been enough to encourage Saudi Arabia to make a move.
Perhaps a more pertinent question would have been whether the PIF could afford it?
As mentioned above, the fund has already committed to a number of high profile, high-price investments. Some $45bn has been put towards the SoftBank tech fund, with $3.5bn going into Uber Technologies and $1bn into Virgin Group. There is also a $4.8bn project to redevelop the Jeddah waterfront, an astonishing $500bn for Neom city, $20bn for a US infrastructure fund, and a reported $400m stake in Hollywood talent and event manager Endeavour. So any move for Tesla might not have got out of first gear on a financial basis.
Another spanner in the works would have been new legislation in the US – signed by President Donald Trump around the same time as Musk’s Tweet came out.
The bill will give the US government more say in which foreign countries and companies can invest in American businesses, and while trade and investment relations with Saudi Arabia are good, Tesla’s technology is reported to be of the type the government is eager to protect and keep at home.
In addition, the US Securities and Exchange Commission issued Tesla with subpoenas over the “funding secured” Tweet. By Musk’s own admission, that funding may not have been secured, which causes a problem for the SEC, which regulates the securities industry. Regardless of the outcome of the SEC’s investigations, the legal, financial, and reputational headache it brings would have slowed down any investment plans from Saudi Arabia or elsewhere.
It is perhaps for these reasons and others that the PIF was reported to be in talks to invest in aspiring Tesla rival, Lucid Motors.
A deal with Lucid would be more affordable for the fund (supposedly around $1bn) while maintaining its determination to invest in electric vehicles. If the reports are accurate, and a deal can be agreed, PIF’s interest in Tesla might have already been dead in the water before Musk pulled the plug on taking Tesla private.
The end of the ride
All the speculation was brought to an end on August 25, when Musk announced he would no longer take Tesla private. The plan was cancelled after a board meeting a few days earlier.
The saga had already cost Tesla dear, with its share price dropping by 20 per cent since announcing plans to delist, but in a post on the company’s website, Musk said he and the board agreed the better path is for Tesla to remain public. He later tweeted that there was support from public investors, too.
And with that, Saudi Arabia’s involvement with Tesla returned to the previous status quo: a 5 per cent share, and an apparent long-term interest in the company.
And in the cold light of day, with the benefit of hindsight, it seems PIF would have been less keen to take Tesla private than first imagined. Existing commitments, more affordable alternatives, and the prospect of regulatory headaches are likely to have steered them away. The journey may have come to an end for now, but with maverick Elon Musk in the driving seat, and the ambitious PIF always on the lookout for eye-catching investments, anything could be possible a little further down the road.