Elon VS JP

Good afternoon all

Give this newsletter a share:

And if you’re reading this and haven’t subscribed, you may do so here:

Let’s get into it.

JP Morgan gets fisticuffs with Elon

JPMorgan filed a lawsuit against Tesla over $162mn worth of stock warrants on Monday this week. It’s unlike a major Wallstreet Investment bank to sue one of its high-profile clients though, it’s not unheard of… let’s face it.

Wayyy back in 2014 when Tesla’s market cap was a measly ~$25bn, Tesla needed to raise some capital to build its first Gigafactory. JP Morgan came forward as one of their funders and offered capital in return for stock options (warrants).

These warrants gave JP Morgan the option to buy Tesla shares at a fixed price over a specified period of time. Initially, this fixed price was $560.6388 a share and the expiration occurred in June/July of 2021. These options are very common and are used an awful lot by publicly listed companies to award management teams.

When the share price of Tesla goes above the fixed price of the warrants then its quids-in for JP Morgan. Unless you were born yesterday or have been living under a rock, JP Morgan’s options have become stupidly valuable.

So how has it all gone tits-up for JP?

Well, as with all high-profile tom-foolery surrounding Tesla, you only need to take a look at Elon’s Twitter account - his primary vector for Wallstreet f**kery.

In 2018, some of you may remember Elon’s infamous “funding secured” tweet, where he expressed his intention of taking Tesla private for $420 a share. Since the JP’s warrants had a strike price of $560.6388, they’d be losing money (aww diddums).

But, JP Morgan is a top firm and thought about this scenario. In the agreement underwriting the stock options, there is a clause that allows the bank to adjust the strike price of the options to protect both Tesla and JP Morgan against the economic effects of “significant corporate transaction involving Tesla”.

A CEOs intention to take his company private could fall under this clause. Hence JP Morgan asserted that their options were worth less (plus there was lots of volatility so they must have altered their Black Scholes models a bit) and tried to pressure Tesla to reduce the strike price to $484.35 share.

Musk went back on his word about taking Tesla private causing Tesla to push back against JP; Tesla’s lawyers doth protested and wrote to JP saying that the bank was being opportunistic and taking advantage of the volatility after Musk’s tweet on the grounds of the fact that no significant corporate transactions had occurred. The initial strike price of $560.6388 must remain.

This back and forth has lasted a few years and Tesla has settled some of the shares but not in full. This has caused JP Morgan to trigger an “early termination” clause and allege that Tesla still owes them 228,775 shares when the bank terminated its deal with Tesla on Monday.

Let’s see how this lawsuit progresses.

Ryanair to boycott the LSE

This Friday, the fiery CEO of Ryanair O’Leary announced the company’s intention to delist from the London Stock Exchange ending a 20-year history of peaks and trough’s whilst listed on the LSE.

UK shareholders can continue to hold the stock if they want, but now have to sell through the Euronext exchange should they want to divest.

The reasons outlined in the regulatory news is that the volume of traded shares have declined to the point where it does not justify the costs related to such listing and the admission of the shares to trade on the exchange. It’s the board’s belief that trading solely on the Euronext in Dublin will benefit the shareholder’s and trim costs for the airline.

A more divisive macro-economic reason that was not explained in the RNS is that now the UK has left the EU, Ryanair being listed on the LSE does not comply with EU airline rules, in particular, the stipulation that EU airlines must be majority-owned and controlled from nationals within the bloc, Switzerland, Norway, Iceland or Liechtenstein.

Now, Ryanair has been structuring its corporate to align with this; earlier this year it barred non-EU individuals from buying its shares and took away UK shareholder’s voting rights to remove snd redistribute control to shareholders who are members of the bloc and countries stated above.

I mean, the airline industry has always been an ugly place to buy equity. Here’s a quote to illustrate my point:

If you want to be a millionaire, start with a billion dollars and launch a new airline - Richard Branson

Or how about Warren Buffett’s witty remark to have a “helpline” that would call him at any time, day or night, and the phone operator talk him “out of buying airline stocks”.

The airline industry has suffered a lot and is unattractive as it is, does the EU really want to take away shareholder’s rights over airline companies reducing access to much-needed capital??

If you’re going to take away anything from this newsletter, stay clear of airline stocks.

That’s all I have to say.