Tesla Going Private Could Hit Many ETFs

August 07, 2018

Today, Tesla CEO and founder Elon Musk took investors by surprise when he tweeted that he was considering taking the company private, should Tesla's share price hit $420.

The legitimacy of Musk's statement is anybody's guess. (The number 420, for example, is commonly associated with marijuana enthusiasts.) Regardless, the news sent Tesla share prices soaring, even leading to a midday trading halt at $367/share.

As of Tuesday afternoon, Tesla had published an email Musk sent to employees stating that a final decision to take Tesla private had not yet been made. But the possibility alone leaves investors, particularly ETF investors, in an uncertain place.

All together, 103 ETFs hold some 4.8 million shares of Tesla, worth a combined $1.45 billion. If Tesla goes private, what happens to those holdings?

When A Stock Goes Private

Public companies going private again is unusual, but not unheard of. For example, in 2005, KKR, Bain Capital and Vornado took Toys 'R' Us private; in 2013, Dell Technologies went private, only to go public again last month.

To transition a stock from the public markets back to private status, first, a group of investors must purchase the majority of the company's outstanding shares. Then the company delists from public exchanges.

From a regulatory standpoint, this is typically a much easier process than launching an IPO. In fact, the hardest part of going private is usually coming up with a tempting-enough offer for the company's existing shareholders, so that the majority is willing to sell their shares to the private bidder.

Often, that private bidder ends up paying a substantial premium above the stock's current market value to acquire the majority of shares.

Furthermore, once the tender offer for the public shares is made, the shareholders and the board of directors still need to approve the buyout. (Musk alluded to this in the letter he wrote to employees, stating that his proposal would "ultimately be finalized through a vote of our shareholders" first.)

Institutions Have Major Say

Naturally, larger shareholders have more sway about how the buyout process unfolds than mom-and-pop investors. "It's actually institutions, including mutual funds and ETFs, that own big blocks of stock that would be most likely to dictate the terms," said Dave Nadig, managing director of ETF.com.

In this particular case, no single ETF holds a significant amount of shares outstanding or market value of Tesla. The greatest market value held by any one ETF is $389 million, by the Invesco QQQ Trust (QQQ). That's just 0.64% of Tesla's total current market value of $61 billion.

Other ETFs with significant monetary stakes in Tesla include four massive Vanguard funds, including the $102 billion Vanguard Total Stock Market ETF (VTI); the $36 billion Vanguard Growth ETF (VUG); and two ARK ETFs, the ARK Innovation ETF (ARKK) and the ARK Web x.0 ETF (ARKW).

 

ETFs Holding Highest Amount Of Tesla, By Market Value
Ticker Fund TSLA Allocation TSLA Market Value ($M)
QQQ Invesco QQQ Trust 0.59% 388.76
VTI Vanguard Total Stock Market ETF 0.16% 151.29
VUG Vanguard Growth ETF 0.38% 134.90
IWF iShares Russell 1000 Growth ETF 0.30% 127.80
ARKK ARK Innovation ETF 7.95% 93.16
VXF Vanguard Extended Market ETF 0.89% 57.25
LIT Global X Lithium & Battery Tech ETF 4.66% 42.16
ARKW ARK Web x.0 ETF 6.06% 40.74
VCR Vanguard Consumer Discretionary ETF 1.31% 37.81
IWB iShares Russell 1000 ETF 0.15% 30.18

 

But ETFs aren't the only products offered by big beneficial owners like Vanguard, BlackRock or State Street Global Advisors. Enormous asset managers own Tesla stock across a range of investment vehicles, including mutual funds, ETFs, private accounts and so forth.

Mutual fund giant T. Rowe Price owns 9% of Tesla, according to the most recent 13-F filings; while Fidelity owns 8%. Vanguard and BlackRock each own 4%. (In contrast, Elon Musk himself owns 22% of the company.)

Should these large beneficial owners band together, they would be in a position to demand the tender offer most favorable to their interests—and to the interests of their clients.

(Conceivably, these shareholders could also challenge the proposed privatization in court if they felt there was a good reason not to take the company private. However, that would be a difficult case to win, especially given that Musk later tweeted that he would establish a special purpose fund so that investors could remain invested in the company.)

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