Current Price: $4.56
Expected Price: $3
Expiration Date: Q2 2019
This is an asymmetrical bet that Tesla’s acquisition of Maxwell Technologies will fail causing MXWL share price to decline towards pre-announcement levels of $3/share (35% upside) or that eventual merger consideration will be below $4.75 due to decline in Tesla’s share price. The spread to the acquisition price stands at 4% (downside).
This trade is predicated on continued troubles at Tesla and simply shorting Tesla might provide a better way to play this. However, unlike in Tesla short, the downside here is very limited. As I have explained in the section below.I consider the risk of overbid to be very low.
Maxwell borrow is available at 4%.
Ways to Win
On the 4th of February Tesla agreed to acquire Maxwell at $4.75/share payable in Tesla’s stock and subject to the upper limit of 0.0193 Tesla’s shares per share of Maxwell. This upper limit jumps into effect if Tesla’s stock drops below $245.9.
There are a number of ways to win by shorting MXWL close to acquisition price:
- Tesla’s share price continues to decline till merger closes. At $200 merger consideration drops to $3.86/share, at $150 it drops to $2.9/share. Tesla always announces quarterly vehicle deliveries right after the quarter end and if Q1 deliveries are as low as expected by Tesla’s bears it might take only couple weeks to reach $150-$200 levels.
- Tesla’s new share registration statement does not get approved by SEC. This was filed on the 20th of February, and there are speculations that due to limited disclosures and ongoing SEC/Musk debacle it might not get approved (note: so far the timeline from the filling date is normal). If equity issuance is not allowed, Tesla in unlikely to agree to acquire MXWL for cash instead.
- Tesla changes its mind. If the mess within Tesla is as large as seems from it’s sporadic announcements so far this year I would not be surprised if acquisition gets cancelled on Tesla’s initiative. If I am reading the language in the merger agreement correctly Tesla would not even have to pay termination fee. If Musk is ousted from the company by SEC (no idea how likely/unlikely this is), then new management might be willing to clean the house first before proceeding with any new acquisitions.
- MXWL shareholders reject the merger. While this seems rather unlikely as premium to unaffected price is large and there were no other buyers, latest announcement shows that three working days before the initial tender expiration date only 6.5% of shareholders tendered (that might be normal as SEC still has not approved Tesla’s new share issue registration statement).
No other interested parties in Maxwell
The below excerpts form the proxy clearly indicate that no other parties expressed any interest in MXWL acquisition (emphasis is mine). Also worth noting that the initial bid by Tesla was only $2.35/share and then in two months MXWL board managed to push up the price to the current $4.75 seemingly without any negotiating leverage or any other buyers even remotely interested in the transaction.
On January 18, 2019, a member of the Maxwell Board contacted a strategic partner with which Maxwell has had a commercial relationship for several years (“Company A”). The Maxwell Board member inquired whether Company A would be interested in an acquisition of Maxwell. Company A indicated that it remained highly interested in a strategic collaboration and partnership with Maxwell, but it was unlikely that Company A would be interested in acquiring Maxwell. The same member of the Maxwell Board also contacted two strategic partners in the automotive industry to inquire whether they would be interested in an acquisition of Maxwell (“Company B” and “Company F” respectively). Neither Company B nor Company F responded to the member of the Maxwell Board with any immediate interest in acquiring the Company.
From January 17 through January 22, 2019, pursuant to the Strategic Transaction Committee’s instructions, Barclays contacted ten other potential strategic parties, including Company C. Company C expressed to Barclays interest in a potential transaction and had a call with Maxwell’s management on January 21, 2019. On January 22, 2019, Company C notified Barclays that following the call with Maxwell’s management, they were not interested in pursuing a transaction with Maxwell. On the morning of January 23, 2019, Company D notified Barclays that they were not interested in a strategic transaction with Maxwell. On January 25, 2019, Company E e-mailed Barclays representatives and indicated that it was not interested in pursuing a transaction with Maxwell. The seven other strategic parties contacted by Barclays did not respond to Barclays’ outreach.
The proxy was updated on the 15th of March and one of the updates emphasized even further that noone else was interested in MXWL. I am puzzled why it was so important to add specifically this sentence to disclosures.
None of these efforts progressed beyond the initial contacts and none of the parties expressed an interest in entering into confidentiality arrangements to facilitate further discussions of a potential strategic transaction with Maxwell.
Some background on Maxwell
Maxwell is battery technology company developing and producing ultracapacitors (energy storage) and dry battery electrodes that are sold to OEM and integrator customers. MXWL has manufacturing facilities in Arizona and South Korea. The company also owns intellectual property behind its products and technologies. Two largest customers accounted for 12% and 11% of revenues during 2018.
From financials perspective, during 2018 Maxwell did $90m in revenues at 11% gross margin and managed to burn through $40m in cash (vs $210m market cap). Longer term historical performance does not look bright either – continuing losses and declining revenues. Parts of business were sold in 2016 and 2018 so some of the revenue drop can probably be accounted by these disposals.
Thus the existing Maxwell operations clearly do not seem to be worth $200m+. Gross margin would need to expand multiple times from the current $10m to justify such valuation. Whether the IP of the company has any value I have no idea, but as noone else showed any interest in the company, it looks like Tesla might be significantly overpaying.
Interestingly, prior to the merger agreement Tesla and Maxwell had periodic discussions in connection with a potential strategic commercial relationship. But then during the negotiation process Tesla told that it was no longer interested in ‘strategic commercial arrangement’ and would move on if the full acquisition was rejected (at that time Tesla’s $3.1/share bid was on the table, so MXWL still managed to push the price upwards by 50% despite threats from Tesla). Maybe that was just negotiation tactics, but such statement clearly does not give much confidence in value of MXWL IP/technologies.