In a surprising announcement electric car manufacturer Tesla Motors Inc. (TSLA US) offered to buy solar power energy provider SolarCity Corp (SCTY US) for $26.50-$28.50 a share, a 25% to 34% premium. The deal values SCTY at $2.86 billion. In aftermarket trading, TSLA shares are trading at an 11% discount while SCTY shares are trading at a 13% premium.
The deal merges two short side/stock loan behemoths as TSLA, with $6.7 billion in short interest, is one of the largest non-general collateral shorts worldwide while SCTY with $600 million in short interest, is one of the most expensive active borrows worldwide. Stock borrow rates for TSLA have eased to 1.25% to 1.50% fee recently as short interest had dropped $760 million from its March $7.4 billion yearly high. SCTY is “hot” stock borrow, with existing stock borrow rates trading at 38% fee and new transactions trading as high as 70% to 80% fee as most SCTY’s lendable supply has been used up.
Existing TSLA short sellers woke up with a smile as the $25/share premarket price drop netted them an unrealized profit of over $750 million while SCTY short sellers did not feel as lucky with their almost $3/share price increase cost them $75 million in unrealized losses.
With analysts saying the premium TSLA has offered might be on the low side, and might need to be increased by $1.50-$3.50/share, the P\L on this deal is far from being finalized. We expect short side/stock borrow interest to be very active in both securities today, with borrow rates moving upward and supply in both names to become tight. SCTY is already a hard stock borrow, it will be difficult to borrow stock in any size larger than 20,000 shares. TSLA has more stock borrow availability at the moment, but that should disappear quickly if there is any negative sentiment for the proposed deal.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC
Ihor.Dusaniwsky@S3Partners.net
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