A potential merger between Tesla and SpaceX is increasingly being viewed on Wall Street as a question of when, rather than if. However, the prospect of combining Elon Musk’s electric vehicle maker with the privately controlled space and artificial intelligence company has raised a key question: how much of a premium should Tesla shareholders receive?
According to Reuters, estimates of the premium Tesla shareholders could demand in exchange for swapping their stakes in the publicly traded automaker for shares in SpaceX range from little or nothing to as much as 35%. With Tesla valued at around $1.5 trillion, even a modest premium could add hundreds of billions of dollars to the potential transaction’s value.
Musk, who has described himself as a “conflicted party,” has said the committees overseeing the proposed transaction have yet to agree on terms. Nevertheless, Wall Street expects a proposal could emerge in the coming months.
How much premium could Tesla shareholders demand?
The exchange ratio and the premium offered to Tesla shareholders are likely to be among the biggest points of contention in any potential deal.
Analysts at RBC Capital Markets and JPMorgan said that they expect investors to seek a premium of 20% to 35% to compensate them for exchanging their stakes in an independent, publicly listed company for shares in SpaceX, which Musk controls.
Tesla shareholder vote could be a major hurdle
Beyond valuation, the corporate governance and voting control could complicate the proposed merger. The report said that Musk holds roughly 85% of SpaceX’s voting power through super-voting shares, compared with about 20% at Tesla.
A merger could substantially increase his influence over the combined entity. Estimates cited by Reuters suggest Musk could control approximately 57% to 58% of voting rights, depending on the exchange ratio.
Barclays has floated an illustrative exchange ratio of 0.7 SpaceX shares for each Tesla share, although no ratio has been negotiated. Ryan Zurrer, founder of Dialectic, has suggested that a ratio closer to 0.6 could be necessary for Musk to retain control under certain circumstances.
The shareholder approval process could prove equally challenging. Musk has said the Tesla side needs approval from a majority of all outstanding shares, rather than merely a majority of votes cast. That means uncast ballots could count against the proposal, making shareholder participation an important factor.
Governance concerns are also likely to attract scrutiny because Musk leads both businesses. Reuters noted that Tesla’s 2016 acquisition of SolarCity faced years of litigation before a Delaware court cleared the transaction while criticising the absence of an independent committee.
For Tesla shareholders, therefore, the central issue is not simply whether a merger would create a more integrated AI and technology business. The premium offered, the exchange ratio, Musk’s voting control, and the safeguards protecting minority shareholders could ultimately determine whether a deal wins their approval.
(With inputs from Reuters)
Disclaimer: We advise investors to check with certified experts before making any investment decisions.
