Complex Made Simple

Did Saudi see an opportunity in Tesla, or vice versa?

Elon Musk tweeted about plans to take his publicly traded company private, which has sent reverberations throughout the stock market.

Worthy of note, however, is that this announcement did not come out of the blue. In fact, Musk posted the tweet soon after the Financial Times announced that Saudi Arabia’s sovereign Public Investment Fund (PIF) had reached a 5% stake in Tesla. The stake is supposedly worth between $1.7bn and $2.9bn, effectively turning the PIF into one of Tesla’s largest shareholders.

So, this begs the question: Did Saudi see an opportunity for investment in Tesla, or was it Musk who found a prime opportunity for fundraising and share-value inflation upon the reveal of Saudi interest?

Tesla shares swell up

Musk followed up his tweets with several others, easing shareholders’ concerns by explaining that their stakes can remain in the company in a special fund, or that they can sell them off at $420 each.

$420 a share happens to be the price Musk values his company at if it is to go private.

According to UK’s the Guardian, this new valuation would float his company from its current stock market value of $63.8 billion to a whopping $82 billion, a near $20 billion inflation.

The initial tweet sent the stock market in a frenzy, as Tesla stocks made a gradual rise. Shares jumped after Musk’s first tweet, trading as high as $371.15 before giving back gains, CNBC reports.

Afterward, stocks were halted for an hour. They resumed later at 11%, and closed at $378.

Tesla stocks closed at $341.99 a day before the announcement, on Monday, August 6th.

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The future of a country meets the future of humanity

The PIF is the sovereign wealth fund that Saudi banks its transformative future on while Tesla represents everything that humans bank on to leap into the future, from autonomous and electric vehicles to space travel and living on Mars.

Now, both are joining hands which could only bode well for everyone involved.

And at least for the short term, it did just that.

This sudden turn of events could be in favor of both parties, i.e Saudi PIF and Tesla, as Musk has been finding it difficult keeping the company’s objectives and management focused.

“I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees, as possible,” he wrote in a blog post following his tweet.

Saudi’s PIF, on the other hand, would be raising the value of all of its other investments through the mere association with a firm as internationally renowned as Tesla. Shares in PIF-owned Saudi Aramco, for one, could see a rise.

READ: In an electric Tesla-driven age, what’s fuelling the auto sector?

Is this Tesla deal a way to raise the value of Aramco?

Reuters reported that Saudi Aramco, the biggest oil company in the world, recently announced it wishes to buy a stake in Saudi SABIC, the 4th largest petrochemical company on the globe.

Reuters said the move could boost the state oil giant’s market valuation ahead of a planned initial public offering (IPO), despite speculation that the IPO is in danger of never taking place.

Bloomberg said a potential deal between Aramco and SABIC could enable the PIF to raise billions of dollars it had hoped to collect from Aramco’s stalled IPO.

It could also use the cash for other projects, such as an investment in Saudi mega-city NEOM. CNBC reported that officials hope a privatization program, including the sale of 5% of oil giant Saudi Aramco, will raise $300 billion to help fund the creation of NEOM, which is under construction, and that more money will be invested by the private sector.

The liquidity this surge in cash would create would help inflate the value of the PIF, in hopes of meeting its $2 trillion valuation by 2030. The Sovereign Wealth Fund Institute revealed in 2017 that the PIF’s rigorous activities and investments during that year led to a bump in its position globally among other sovereign wealth funds, landing it at 11th place.

Aramco’s further boosting of its downstream (non-production operations) petrochemicals portfolio could help attract potential investors for the IPO, which aims at raising $100 bn from the sale of an Aramco valuation at $2 trillion, Reuters added.

READ: Saudi Aramco raising billions to buy Sabic: Smart but will it work?

Behind the scenes revealed

“The PIF, which manages more than $250bn in assets, reportedly made an overture to Musk earlier this year, offering to invest money in the company in return for new shares,” the Guardian reports. “Tesla ignored the approach, prompting PIF to begin acquiring shares in the company through stock markets, with the assistance of JP Morgan.”

The PIF quietly built up a stake of between 3% and 5% in the company, according to the Financial Times. The investment would not have emerged until now because stakes of less than 5% do not need to be disclosed to the stock market.

Saudi expects the PIF to become the largest sovereign wealth fund in the world with assets of $2 trillion by 2030, generating returns targeted at 8% to 9%.

READ: Can the GCC keep afloat without oil?