Tesla Motors Inc. (TSLA US) and SolarCity Corp. (SCTY US) issued a joint statement last week stating that although their merger is slated to be finalized in the 4th quarter there are four outstanding lawsuits that may delay its completion.
Short interest balances peaked shortly after their June 27th merger announcement with Tesla’s short interest at $6.5 billion and SolarCity’s at $652 million by June month end. By the end of July, with the cost to borrow Tesla stock at 19% fee and SolarCity stock at 66% fee, short interest balances were already starting to slip. Tesla’s short interest was down 4% to $6.3 billion and SolarCity’s down 12% to $573 million.
Throughout July the S3 Crowing Indicator, a measurement of the magnitude of real-time shorting activity relative to market cap and float, showed many easing spikes in both securities but in August we saw a significant increase in easing spikes, which along with a downward trend in the S3 Relative Velocity Indicator, a measurement of the real-time relative change in shorting activity, confirmed that there was a market wide momentum in covering short position for both these securities.
SolarCity had over $186 million of short covering in August, 29% of its June month end balance, and Tesla had $1.9 billion of short covering in August, also 29% of its June month end balance.
In total, $2.4 billion of short positions were covered in both Tesla and SolarCity by the end of August, fully one third of the $7.2 billion of the June’s short interest. With such a dramatic decrease in short demand comes some rate relief in borrow cost as well. The cost to borrow Tesla stock had dropped from a 19% fee to 12% fee and the cost to borrow SolarCity stock had also dropped from a 66% fee to 12% fee.
September saw significant recalls in both Tesla and SolarCity. Long holders who had been lending their shares were recalling their stock in advance of the merger being finalized. Short interest for both stocks was down in the 3rd quarter, with TSLA down $937 million, or 14%, to $5.6 billion and SCTY down $148 million, or 23%, to $505 million.
In the 90 days since the merger was announced lenders generated approximately $209 million of income lending TSLA (13.7% average fee) and $78 million of income lending SCTY (59.3% average fee). Short sellers on the other hand, lost approximately $63 million shorting TSLA (up 4.1% since 6/22) but made $23 million shorting SCTY (down 17.2% since 6/22). In aggregate, long shareholders who lent their shares did very well since the merger was announced; netting $327 million of stock loan income and mark to market P\L while short sellers are down $327 million in short borrow costs and mark to market P\L.
But the merger is far from over, there are four pending lawsuits filed against Tesla which will hold up the deal at least until after initial hearings take place on October 18th. Short sellers remain steadfast in their conviction and foresee long term negative consequences if and when this merger is completed. At Institutional Investor’s Delivering Alpha Conference Jim Chanos of Kynikos Associates stated that when calculating Tesla’s stand-alone Z-score, a predictor of bankruptcy, it is “slightly above the red-line”, but is “well under the red-line by buying SolarCity” due to a predicted “cash burn of $1 billion a quarter” and “constant need to access capital markets”.
The S3 Crowding Indicator has been spiking for SolarCity since mid-September as short interest is up 17% in the last two weeks to $434 million while the S3 Crowding Indicator is showing a week of easing for Tesla as its short interest is down 11% to $4.96 billion The cost to borrow Tesla stock has fallen to the 13% to 15% fee range while SolarCity’s borrow cost has risen to the 43% to 65% fee range. It will take a little longer than the 2.5 second 0-60 time of Tesla’s Model S for short sellers to cash in on their anticipated Alpha, but after enduring an expensive 90+ days it looks like they are in it for the long haul.
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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