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

Gulf Business - - FRONT PAGE - By Neil King

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.

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