Saudi Arabia slashes exposure to Tesla

Sovereign fund hedges $2.9bn bet on carmaker run by Elon Musk

Saudi Arabia’s Public Investment Fund still holds shares in Tesla but hedging leaves it with little exposure if the stock price falls and caps potential gains if the stock rises. Photograph: Ian Langsdon/EPA

Saudi Arabia’s Public Investment Fund still holds shares in Tesla but hedging leaves it with little exposure if the stock price falls and caps potential gains if the stock rises. Photograph: Ian Langsdon/EPA

 

Saudi Arabia has slashed its exposure to Tesla, less than four months after the carmaker’s chief executive Elon Musk settled fraud charges over his claim that the kingdom was ready to back a management buyout.

The country’s Public Investment Fund hedged most of its 4.9 per cent stake in Tesla with the help of bankers at JPMorgan Chase after the market closed on January 17th, according to four people with direct knowledge of the matter.

The arrangement meant that, although it still holds the shares, the PIF was left with little exposure if the stock price falls. Its potential gains are also capped if the stock rises, freezing its $2.9 billion bet on the company.

The move, through a hedging programme put in place this month, marks the latest twist in the relationship between PIF, the state fund overseen by the powerful crown prince Mohammed bin Salman, and Mr Musk.

On August 7th, the FT first revealed that the PIF had built a 4.9 per cent stake, making it one of Tesla’s top-five shareholders. Minutes after that news was published, Mr Musk tweeted that he was close to arranging a buyout of Tesla, precipitating a crisis that resulted in a civil charges from US regulators.

The Tesla chief executive later claimed that Saudi Arabia had been ready to back his buyout plan, giving him the confidence to declare he had “funding secured”. However, the Securities and Exchange Commission charged Mr Musk with making “false and misleading statements”, leading to a settlement in which he paid a personal fine of $20 million and agreed to step down as chairman of the company.

The hedging arrangement has turned out to be well timed. A day after it was put in place, Mr Musk revealed Tesla was cutting 7 per cent of its workforce and warned that it was facing a “very difficult” period, and the stock fell.

On the day of Saudi Arabia’s hedge, Tesla shares closed at $347.26, valuing its shares at $2.9 billion. The stock price has since fallen more than 16 per cent.

Saudi Arabia had been seen as an unlikely Tesla backer given its own economy’s dependence on oil but under Prince Mohammed the kingdom has been looking to diversify its economy and holdings away from oil.

The derivative used to put on the hedge is known as an equity collar, which are bespoke instruments that are costly to finance and have become popular with Middle Eastern and Asian investors. – Copyright The Financial Times Limited 2019