Saudi Arabia's Public Investment Fund Hedges its Stake in Tesla

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【Summary】Saudi Arabia’s Public Investment Fund (PIF) has cut its exposure to electric carmaker Tesla Inc. The move is a sign that the PIF is concerned about Tesla’s long-term profitability.

Eric Walz    Jan 28, 2019 11:32 AM PT
Saudi Arabia's Public Investment Fund Hedges its Stake in Tesla

Saudi Arabia's Public Investment Fund (PIF) has cut its exposure to electric carmaker Tesla Inc, according to a report by the Financial Times (FT) on Monday, citing people with direct knowledge of the matter. The announcement sent Tesla shares down 2 percent.

According to the FT, the sovereign fund, with guidance from JPMorgan Chase, hedged most of its 4.9 percent stake in Tesla after the market closed on Jan. 17. The move is a sign that the PIF is concerned about Tesla's long-term profitability. The timing is questionable, as Tesla announced massive layoffs the next day.

The day after on Jan 18, Tesla announced it would cut thousands of jobs to help lower vehicle production costs, as the company ramps up production of the Model 3, its first mass-market electric car that is vital for Tesla's long-term profitability. That announcement sent the company's shares down as much as 10 percent.

The derivative used to put on the hedge is known as an equity collar, which is generally used by investors concerned about the downside risk of a large stock position. Collars allow an investor to place a cap on upside potential in order to limit their downside risk at little to no cost. Equity collars are primarily intended to protect profits. Collars have become popular with Middle Eastern and Asian investors, the FT said.

In a surprising tweet on August 7, 2018, Elon Musk wrote he was considering taking Tesla private and that funding was "secured." Musk said the PIF was interested "because of the important need to diversify away from oil." The announcment sent Tesla shares down nearly 20 percent.

At the time, the PIF held around 5 percent of Tesla stock, purchased through public markets.

Musk said the Saudi's PIF had met with him several times since early 2017 and expressed support for a $72 billion deal to take Tesla private.

Muks' tweet drew the attention of the The U.S. Securities and Exchange Commission (SEC), which resulted in a suit filed against the outspoken CEO The SEC said that the meeting between Musk and the fund "lacked discussion of even the most fundamental terms of a proposed going private transaction".

Musk and the SEC settled the case in Oct 2018. Under the terms of the $40 million settlement, Musk was hit with a $20 million fine and was forced to step down as Tesla chairman for at least three years. Tesla was also ordered to put in place a system for monitoring Musk's statements to the public about the company, on Twitter or any other social media platform.

In addition, Tesla was fined $20 million, and was ordered to appoint two new independent directors to its board.

Saudi Arabia's PIF was established in 1971 and invests in aerospace, energy, green technologies, and security with a particular focus on renewable energy and information technology and housing finance.

Although the deal with Tesla never materialized in August, the PIF made a significant investment in a Tesla rival a month later. In September 2018, the PIF announced a $1 billion investment in Lucid Motors, a California-based electric car startup. The company hopes to launch its first car, the Lucid Air in 2020. The Air is a ultra-luxurious electric sedan designed to compete with luxury electric models from Tesla, Porsche and Audi.

The PIF is also one of the largest investors in ride-hailing giant Uber. In July 2016, the PIF invested $3.5 billion for a 5 percent stake in the ride hailing company. Uber plans to go public this year.

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