Thoughts On Tesla’s Stock Price Collapse Following SolarCity Buyout Offer

Originally published on EV Obsession.

What was the cause of the Tesla stock price plunge following the announcement of the (possible) SolarCity deal? Conventional wisdom says that it’s the result of the deal being a “bad one.”

But what are the other interpretations? What about the notable fact that Tesla investors and SolarCity investors are in many cases one and the same people? What about the other possibilities (of which there are many)?

On that note, “MikeC” on the Tesla Motors Club forum recently laid out an interesting scenario. Here’s his comment:

A lot of people attribute the drop in share price to the acquisition being a bad deal for TSLA. Here is my alternate theory:

By offering .122-131 share ratio, TSLA enabled an arbitrage opportunity. The closing prices today for TSLA and SCTY were 219.61 and 21.19, respectively. This is a ratio of 0.096, which means you would sell TSLA and buy SCTY at that ratio, and have your TSLA returned back to you at .122-.131. You will notice the ratio of the AH closing prices is 0.126, right in the middle of the offer’s range.

So TSLA had to go down when SCTY went up.

When questioned about the lack of more of a pop with regard to SolarCity stock prices, he elaborated:

Because the ratio is roughly 1:8 TSLA to SCTY. TSLA dropped about 8x what SCTY gained. I wouldn’t say that this would mean that traders see it as a done deal, it’s just that since it’s the current offer on the table, it’s the apparent fair market price.

I’m thinking of it from the standpoint of “Should I sell my SCTY to buy more TSLA”? Since ~.125 share of TSLA will be worth one SCTY share, it will make sense to sell SCTY to buy TSLA whenever the ratio gets higher than that. But I think that the two will stay at the fixed ratio of the terms of the offer.

An interesting idea, though the two comments below make some points that I think are worth taking into consideration.

“Waiting4M3” noted:

The absolute PPS of TSLA vs SCTY is 8:1, you sell 1 share of TSLA and can buy 8 shares of SCTY. But there is no set rules that says selling 1 share of TSLA will drop TSLA’s PPS by x%, and buying 8 shares of SCTY will raise SCTY’s PPS by y%. Stock price is not a zero-summed game. So I don’t see any reason why the price change should follow the 8:1 ratio.

The after market movement still doesn’t quite make sense to me, TSLA has lost $4 billion in market cap while paying SCTY $2.6 billion in the acquisition. This only makes sense if the market thinks SCTY will fail in long term and it will be worth nothing, except TSLA will take on its debt. SCTY has $2.7 billion in long term debt and $890 million in equity as of March if I believe my quick Google search, so net $1.8 billion in debt. So the market is reacting as if TSLA just paid $2.6 billion now, and will throw away another $1.8 billion in the future to pay off SCTY’s debt, totaling 4.4 billion.

And in response, “SteveG3” noted:

indeed, it’s just shorts trying to create perception. I don’t know if the deal is good or bad, but, I’m also pretty confident that the shorts didn’t in the span of a few minutes analyze the two businesses and the probable outcomes of an acquisition and determine that SCTY is completely worthless when owned by Tesla, despite the market valuing it at ~$2B as a stand alone business an hour earlier. again, I see this as the shorts having a go at trying to create perception…

Any thoughts?

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