Musk’s Tesla merger pitch offers SpaceX path to S&P 500

Months after S&P Dow Jones Indices ↗ 1.08% declined to fast-track SpaceX into its flagship benchmark, Elon Musk may have found a way around the wait. Bloomberg reported on November 14 that talks are moving toward combining SpaceX with Tesla ↘ 1.82%, one of the largest members of the S&P 500 ↘ 0.36%. The deal would fold Musk's electric car, AI, satellite launch and social media businesses into one company.bloomberg.com

The index question matters because inclusion would require about $16 trillion in passive index-tracking money to hold the combined company's shares, according to Bloomberg. Reid Noch of TD Securities The Toronto-Dominion Bank ↘ 0.03% estimated that adding the merged company could create about $100 billion of demand from index funds. At Friday's closing prices, the two companies together were worth nearly $3.5 trillion, which would make the combined firm the fifth-largest company in the index.ca.finance.yahoo.com

Inclusion not guaranteed

Joining the index after a merger would not be automatic. If the combined company were left out, passive funds would have to sell the shares they would likely receive in the deal, Bloomberg noted. The simplest route would be for Tesla to acquire SpaceX, the larger of the two, but few expect the deal to be set up that way. Analysts argue the merged company could still keep Tesla's spot because doing so would limit turnover in the index. On its own, SpaceX does not yet meet the index's rules, which require a year of trading and profits over the previous four quarters combined. Analyst estimates suggest it could meet them by mid-2027.ca.finance.yahoo.com

After SpaceX's June IPO, Nasdaq ↘ 0.17% changed its rules to speed the company's entry into the Nasdaq 100. S&P chose not to change its rules for megacap listings, and an S&P spokesperson declined to comment on market speculation.

Talks gather pace

Musk said on SpaceX's October 20 earnings call that a merger "would be a good idea" and confirmed that both companies had set up special committees, Reuters reported. He also said the committees had not agreed on terms and might never do so. Tesla shares rose on November 12 after Bloomberg reported that a deal, potentially the largest corporate merger ever, could be announced as soon as December, Dow Jones reported.fidelity.com+1

Concentration concerns

Both companies trade at high valuations. Tesla is priced at more than 180 times expected earnings, while the S&P 500 as a whole trades at about 18, Bloomberg reported. Duke University professor Campbell Harvey said "it's difficult to make the case for it to be excluded from the most important index in the world." Brent Leadbetter of TMX Group's VettaFi warned that large-cap indexes are "becoming more concentrated and that concentration brings risk."ca.finance.yahoo.com