Elon Musk needs to raise at least $1.15 billion more to bring his more affordable Model 3 to market. His believers, along with investors who buy into the vision of Tesla Inc., could hardly be happier.
After burning through cash in late 2016 and warning Wall Street that the company was “close to the edge,” Tesla announced Wednesday that it would sell new stock and convertible securities while preparing for volume production and deliveries of its first mass-market car later this year.
News of a big stock sale typically depresses a company’s share price because it dilutes the value of investors’ holdings. But this is Musk, whose vertically integrated clean-energy company has captured imaginations on and off Wall Street even as the Palo Alto, California-based company has struggled to be profitable. Instead of falling, Tesla stock rose in late trading.
The proceeds from Tesla’s offering of $250 million in shares and $750 million in convertible debt will be used to strengthen its balance sheet and reduce risks associated with introducing the Model 3 sedan, Tesla said in a statement. The Model 3, scheduled to start production in July, will start at about $35,000 before incentives and is smaller than the Model S.
The offering will cushion the balance sheet of the youngest publicly held U.S. automaker, which is ramping up spending ahead of the Model 3’s arrival. Tesla burned through $970 million in the fourth quarter and expects as much as $2.5 billion in expenditures during the first half of 2017. If anything, the size of the capital raise is smaller than many analysts had expected.
“We would not be surprised to see the raise upsized as we expect the company could use the capital, especially as it enters full ramp of the Model 3,” said Colin Rusch, an analyst at Oppenheimer & Co. “We would be encouraged to see the company raise closer to $2 billion.”
The offering is expected to price on Thursday after the market closes, according to a person familiar with the process. Tesla was up 2.5 percent to $262.14 late Wednesday.
While raising cash isn’t critical to releasing the Model 3, it would probably be wise, Musk said on the Feb. 22 earnings call. Tesla has reported losses in all but two quarters since its inception.
On the Edge
“According to our financial plan, no capital needs to be raised for the Model 3, but we get very close to the edge,” the chief executive officer told analysts on the call. Since “that’s probably not the best thing for shareholders,” Musk said, “it probably makes sense to raise capital to reduce the risk.”
Musk, 45, is Tesla’s chairman and largest shareholder, with a 20.8 percent stake. He’ll participate in the capital raise by purchasing $25 million of common stock, the company said.
The billionaire has borrowed for years from Tesla underwriters including Goldman Sachs Group Inc. and Morgan Stanley. Tesla’s prospectus shows Musk has a $344.4 million loan from Morgan Stanley. He has also borrowed $279.9 million from financial institutions that aren’t involved in the company’s offering and are secured by a portion of Tesla stock, the company said.
The Model 3 is the key to Musk’s push to reach mainstream consumers. At last count, Tesla had roughly 373,000 reservations for the vehicle. The company’s $41 billion market value makes it almost as big as Nissan Motor Co. and not far off from Ford Motor Co., rival automakers that sell millions of cars a year.
Tesla produced almost 84,000 vehicles in 2016 and plans to make half a million in 2018, then 1 million in 2020. It expects to deliver as many as 50,000 vehicles in the first half of this year, before ramping up Model 3 production to more than 5,000 a week in the fourth quarter.
Goldman Sachs, Deutsche Bank AG, Citigroup Inc. and Morgan Stanley are leading the stock offering, Tesla said in its prospectus. The automaker has granted underwriters a 30-day option to purchase an additional 15 percent of each offering. The company last tapped bond markets in 2014, when it sold $2 billion of convertible notes to help fund its “gigafactory” for battery production east of Reno, Nevada, according to data compiled by Bloomberg.
“Bears will likely say the deal is too small,” Ben Kallo, an analyst at Robert W. Baird & Co., said in a note. “We believe this displays Tesla’s confidence in the Model 3 timeline and anticipate shares will move higher.”