Daimler Closes Hedge, Dumps Tesla, Grabs Cash, Runs

Daimler, maker of Mercedes-Benz and Smart cars, trucks – including Freightliner in the US – buses, vans, and other utility vehicles has the industry’s “biggest portfolio of electric vehicles,” as it says, with numerous models of cars, vans, buses, and light trucks. So it was logical that, in May 2009, it would acquire a 9.1% stake in Tesla. As Tesla raised capital over the years, Daimler’s share was diluted to around 4%. And now it has exited from that investment with near impeccable timing, turning it into a glorious pile of sweet cash.

But why the heck did it do that?

Tesla didn’t invent electric cars. In 1899, so 115 years ago, an electric taxi ran over some hapless guy on West 74th Street and Central Park West in Manhattan, turning him into, according to a plaque there, the first automobile fatality in the “Western Hemisphere.” At the time, 90% of the taxis in New York City were electric, as were 30% of all cars sold in the US. They were way ahead of us back then.

But Tesla invented how to market electric cars – to investors. After raising hundreds of millions from private investors (including Daimler) and the US government in its early years, it raised billions in various debt and equity offerings, first when it went public in June 2010, then in follow-on offerings and private placements of shares and convertible notes in June 2011, October 2012, May 2013, and February 2014. Each offering was much larger than the prior one and came with enormous hoopla, fanfare, and hype under the wise tutelage of Goldman Sachs.

And it has been able not only to charm the federal government but also state governments – most recently the government of Nevada, which promised juicy incentives for the future Gigafactory.

In this aspect of its business, Tesla excels like no other car company.

And few companies outside of Apple have the kind of googley-eyed media attention ceaselessly riveted on them as Tesla does. But unlike Apple with its mega-ton weight in the smartphone industry, among other industries, Tesla isn’t even a rounding error in the auto industry. Of the 72 million or so passenger vehicles to be sold in 2014, Tesla’s sales would amount to a share of about 0.05%. It’s a tiny car company with a history of losses and cool, expensive cars of apparently less than stellar quality. But no matter. After a phenomenal multi-year ride, the company has a market capitalization of over $28 billion.

Now Daimler turned one of the hottest stock run-ups into cold cash. It announced on Tuesday evening that it has unloaded its stake to an undisclosed buyer. It will book a profit before taxes of $780 million.

“We are extremely satisfied with the development of our investment in Tesla, but it is not necessary for our partnership and cooperation,” said CFO Bodo Uebber in the company’s statement. Extremely satisfied is likely the understatement of the decade. “For this reason, we have decided to divest of our shares.”

It also announced that, before unloading the shares, it had terminated its share-price hedge established in December 2013. A the time, it must have grown increasingly nervous about the nosebleed valuation of its investment in Tesla and didn’t want to see a big part of it evaporate if the stock suddenly tanked.

Hedges of this kind are expensive. You don’t blow money on them unless you see a reason. And Daimler knows a thing or two about how to value a car company – and when it’s time to start fretting. Immaculate corporate speak followed: “Daimler restructures cooperation with Tesla” is how Daimler explained its immensely profitable exit.

The cooperation between the two companies would continue, Daimler labored to point out a number of times. This would include the agreement to supply certain Mercedes-Benzes and Smart cars with Tesla electric drive and battery technologies. “Our partnership with Tesla is very successful and will be continued,” reiterated Daimler CEO Dieter Zetsche. OK, we got that.

After hours, Tesla investors took the signal from Daimler with barely a frown, consoled perhaps by the certainty that, while Daimler was bailing out, some undisclosed entity was bailing in at the exact same price. Daimler rode the stock all the way up on one of the most dizzying rides imaginable, and back down a scary 20% or so if the transaction price was established over the last few days, to still pocket to its greatest relief $780 million. The next guy is unlikely to get that lucky.

Back on earth, there is a different reality. When NCR lowered its guidance, its stock got knocked into a 21% plunge. While at it, NCR revealed to just what extent brick-and-mortar retailers were sinking into a quagmire of store closings, restructurings, and bankruptcies – as the American consumer runs out of options. Read… What NCR just Said about the American Retail Quagmire

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