Snap (SNAP) and Tencent (0700:HK)

Yesterday, as part of its disappointing quarterly earnings announcement, SNAP revealed that Chinese internet giant Tencent has acquired a 12% stake in the company.

This is considerably less than it seems, however, for three reasons:

–US securities law requires that an acquirer make a filing–called a 13D–declaring its intentions once it has built a 5% voting interest in a publicly traded company.  It must also report every +/- 0.5% change in its ownership interest as long as the total holding remains at 5% or above.  Based on this rule, a quick reading of the Tencent headline suggests the Tencent move up came in at least one large chunk and fairly recently.  Not in this case, however.  SNAP has issued only non-voting shares.  So the SEC filing requirement doesn’t apply.  In fact, Tencent says it has acquired the stock in the open market over a lengthy period.  Therefore, the 12% stake is not a this-week vote of confidence by Tencent in the SNAP management.

–the stake was acquired in the open market, not from SNAP directly.  Therefore, the large amount of money Tencent spent on SNAP shares did not go into the company’s coffers.  It went to third-party holders exiting their positions.  So, yes, Tencent took out sellers who might otherwise have put downward pressure on SNAP’s share price.  But SNAP did not receive the benefit of a substantial cash injection.

–also, the fact that these were open market transactions does not signal the strong commitment to SNAP that a direct purchase of a block of shares from SNAP would have.  Tencent could disappear from the share register just as easily as it appeared.

Tencent (700:HK) now owns 5% of Tesla (TSLA)

The Chinese internet conglomerate Tencent filed a 13G form with the SEC yesterday, fulfilling its legal requirement to declare 5% ownership of a publicly traded US firm–in this case, TSLA.

Filing a 13rather than the better-known 13D indicates Tencent intends to remain a passive investor rather than seeking a voice in TSLA operations.

According to the filing, Tencent acquired its 8.2 million shares (at a cost of $1.8 billion) both by participating in TSLA’s public offering on March 17th and through market purchases.  Tencent reached the 5% level on March 24th.

When I first heard of the stake, it struck me as peculiar that Tencent would make open market purchases, in which the money goes to third parties, rather than arranging for a private placement of stock from TSLA, in which case all the money would go to fund TSLA.  Looking at the 13G a little more closely, however, I realized that Tencent’s total cost implies an average acquisition price of $219 a share, meaning Tencent has been patiently accumulating shares at lower prices.  Now I’m thinking that Tencent took part in the recent offering to provide some financial support to TSLA–and then rounded its position up to 5% during the following few days in order to file a 13G that publicly declares its backing.

the TSLA offering

The TSLA offering raised about $1.3 billion, through an issue of $400 million in common stock plus $1 billion minus in 2.375% convertible five-year notes.  The conversion price is $327.50, a 25% premium to the stock price at the time of issue.

The notes are convertible, at the option of the holder, but, practically speaking, only if they are trading at a 30% premium to conversion value.  To my mind, though, they represent a much better deal than fixed income investors have gotten in prior TSLA offerings.  This seems to me to imply that these buyers see much greater credit risk with TSLA today than they have in prior years.