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Capital Raise

First, Congrats on an Amazing Q4. As a Tesla stock holder, and future Tesla owner as soon as the X and/or super car comes out, I would like to see a large capital raise. The stock volatility is very distracting. At a $10 bil valuation, I would like to see you raise $2 bil. As opposed to the traditional methods that are often dilutive and brings down the stock price so the Investment banks customers can profit and get an easy free lunch, I suggest raising the money through a strategic partner. AAPl comes to mind as they won't get any better return on their cash and perhaps both companies can benefit on working together on UI technologies for the car. AAPl also has much of their cash outside of the US which is worth less to them due to taxes and repatriotixation. At some point TSLA will need additional factories outside the US so this could be a good fit. The best part, although dilutive by 20% or so, TSLA stock probably would not go down on the news because:

1) The stability of $ 2 bil on balance sheet. Short thesis goes away and volatility in stock will reduce substantially.
2) The seal of approval from a stable company like apple. TSLA would probably go up on the news despite the dilution on the thoughts "If Apple thinks it is a good investment, it probably is.
3) More folks will be willing to invest with a rock solid balance sheet
4) This would allow TSLA to move up the delivery date of the X. Capital resources would be less of an issue. I think this is critical because I think time will show a high priced SUV will be a better seller than a high priced Sedan. SUV's are the top selling vehicle for Porsche and Lexus. They will be for Tesla as well. I feel the best shot for TSLA to ship 40,000 units in 2014, is by having both the X and the S for most of the fiscal year. It would not surprise me if the X out sells the S in its very first year. Most importantly, this reduces the risk of any slowdown in S sales as you get past the early adopters. Porsche only sells about 28,000 Panamera's and has only sold 100,000 since 2009. Launching the X sooner reduces sales risk on having only one product for 7 more quarters. Although costs will be higher, the successful launch of a second high volume model will more than compensate for the hit to profits and margins in the short term.
5) The additional stock wil be in strong hands that are not selling as opposed to hedge fund customers of the large brokers. Again, this will result in the stock not going down on the dilutive news.
6) The raise takes away a big piece of uncertainty that the shorts keep pointing to that a capital raise is coming. Again, volatility will be reduced so the stock is more investable.

Other strategic partners that would have similar effect of completing a capital raise without a big hit to the stock include in rough order of market impact BRK/a, GOOG, GE, and then the various car companies... A new car partner may have more impact than the existing ones.

I am looking forward to the completion of a capital raise quickly so I can substantially increase my investment position.

I think it comes down to the alignment of interests if Tesla wants to go with a new partner. If Apple, Google, or anyone can agree to give Elon full reign over the use of the funds, then it will be a perfect fit. Otherwise, I don't think Elon will go for it, IMO. He can have far more flexibility with an offering. Dilution, yes. However, the potential for share holder value is increased I think if Elon has ultimate control as opposed to expanding the board and potentially slow the progress. What, only 115m shares out there now? Add 10-13m more won't hurt at all in the big scheme of things.

I guess just have to weigh a partnership the pros and cons with respect to Elon's objectives. What method of capital raise will reinforce/support his objectives the most?

How about join force with Apple to show case Tesla car in their flag ship stores?

Well, that answers that question!
Registration statement

http://archive.fast-edgar.com/20130515/Aabt5znwy-e-p4vu-s-y-rB0US-q3P-y

I wish Tesla was raising $2 bil instead of $800 mil putting the subject of capital raises to bed for a long time. I also don't understand why they are paying back the cheap DOE loans when they don't have too!!!

Although Musk putting in his own money has the stock up in after hours, and it is great that he has confidence to buy additional stock at these levels, I would prefer AAPL, GOOG, GE or BRK money as it is non-leveraged (Musk is using Margin) and it is an independent validation. Not to mention all the fees to the big investment banks that would be saved as a partnership investment would be direct...

I hope they raise the size of the offering substantially and perhaps name a strategic partner as part of the offering....

Can someone from TSLA please explain why they are paying back the cheap DOE loans early?

What I like: "Mr. Elon Musk, our Chief Executive Officer and Chairman of our Board of Directors, has indicated his preliminary interest in purchasing..." 1.2 million common shares of TSLA at an average cost of $83.24 / share.

As to why they aren't issuing $2B+ in new equity... perhaps TSLA (and Musk) have calculated (based on information only they know) that the company is worth a heck of lot more than $83 / share of current outstanding.

Is there a more favorable tax reason (interest payment deduction) that would lead to this senior convertible note offering?

I forget how interest payment deductions benefit Weighted Average Cost of Capital.

Where are all the MBAs???

Regardless --- enjoy these next 10-20 years as we are witnessing something that is changing the world... for the better.

Lotusguynyc: Can someone from TSLA please explain why they are paying back the cheap DOE loans early?

two part answer:
a) gets rid of criticism of using government funds
b) gets those debts off the books for some lower margin quarters in future statements due to plant expansion, store expansion, SuperCharger network expansion.

Lotusguy - Among other things, Obama and Co actually hold 3,090,111 Tesla warrants at exercise prices $7.54 - $8.94. Paying off the loan early cancels these warrants.

By paying off the loan, Tesla no longer has to comply with the loan terms. Since interest will surely be much higher on the notes than on the loan, it's worth wondering what part of the agreement they don't like.

For example, the terms of the loan do not allow Tesla to be sold. When this transaction is complete, it will be possible to sell the company.

The "obvious" buyer (cash rich, not from the auto industry) would be Google, but it is not at all clear that Musk wants this right now. He has said he's made commitments to key staff that he will continue to run the company through the completion of gen III. Also, Google shareholders might not react well to such an expensive merger. Tesla has a totally different business model.

Musk had also mentioned the possibility of creating a holding company, a "Musk Industries", for his companies, though the net advantage of this is not clear to me. That too would be blocked by the loan terms.

Another problem with the loan is politics. Every story on Tesla mentions the loan, and the company has suffered a bit from guilt by association with Solyndra and now Fisker. Still, Tesla obviously hasn't suffered that much.

I get the timing of the offering, and was expecting it. I remain puzzled about the early loan repayment though.

Digisats, the loan was already scheduled to be paid five years early, by 2017, so the warrants were already going to be cancelled anyway, as they could be exercised starting in December 2018.

So that's not why they are doing this.

holidayday@aol.com, but there will be new debt on the books. $450 million of senior secured notes. And these are convertible to stock, though the company says it is hedging against that causing dilution.

Musk Holdings is very interesting for the reason of developing, protecting, connecting, financing SpaceX, Solarcity, Tesla, and any other company Elon will create.

I think he sees where this thing is going a lot clearer now, and is going to establish the larger strategic framework. I think this includes giving the reigns over to a new CEO for each of his subsidiaries(Tesla, SpaceX, etc...) This will free him up to do the deep thinking without having the stress of running multiple companies on day to day basis.

He himself has said he's a generalist. A generalist on Elon's scale starts a holding company. With goals of changing how we consume and create energy, as well as accelerating multi-planetary habitation... this could get very interesting.

Even with a holding company, he will stay as CEO of SpaceX indefinitely. The company already has a COO (Gwynne Shotwell) for day to day operations.

I think he'll evolve from CEO once SpaceX goes public, IMO.

By repaying the cheap DOE loan early, Elon Musk became more than a man, he became a legend. I am the only one living vicariously through Elon Musk? Now the green energy movement has a really successful talking point, Tesla.

After DOE loan payment, this might put Tesla's cash on hand maybe 450-480m. How much is it going to cost to build out the MX line? How much will it cost to establish cross country supercharger network objectives by end of Q3?

How much will it cost to build the genIII part of the factory? Wonder how much money Tesla had projected and where they stand on that projection today...

This just means probably a 20 part prequal to the 5 part trilogy coming soon...

The Star Wars saga of announcements...

Does anyone know how the math adds up to 830m?

1 question- why the convertible debt option as opposed to all equity? I am sure there was a reason for this and would like to know the real reason...

1 suggestion- significantly raise the size of the offering which happens a lot during these transactions. Cash is king and the car biz is very capital intensive. Too often, I have seen exec teams worry about dilution and raise just enough. You have a chance to raise at roughly a $10 bil valuation, raise all you can and don't worry about dilution. This way tsla is in control of it's own destiny with resources to finance the x, and gen 3 without going to the capital markets again. It would also provide a cushion in case a really bad event happens like a recall , a 1 qtr miss of S sales ,, or say the government stops the $7500 ev credit....

This will be at a valuation of between 3-4x of the last secondary less than a year ago. Put $2 bil on the balance sheet please.... And see if part can be direct with a strategic partner like Elon's investment is. If it is a strong partner, the stock won't go down on news of a larger secondary....

jk214, 450 from the notes + 100 from Musk + 280 from the rest of stock. I worked it out to $90 a share but I've read somewhere it's a bit less. In any case I understand the final price is not set yet, and will be set at the end of tomorrow.

lotusguynyc, convertible paper reduces dilution and creates a vehicle where lower risk investors can invest in Tesla. This expands the pool of investors.

I'm not super sure why they would need $2 billion on the balance sheet. There is a limit to the speed at which they can scale, regardless of money.

jk2014, the problem with gen III is not just the factory. Besides needing a next generation, lower cost battery, Tesla simply does not have the boots on the ground to deal with 200,000 cars on the road. It takes years to build a support organization so geographically spread out. These guys won't be flipping burgers. They need training, managing, monitoring, etc.

jk2014, not sure SpaceX will ever go public. Musk has stated it's not capital constrained. Musk will retain absolute control of SpaceX till Mars is done, at least.

Elon is doing the right thing by raising additional capital via a combination of stock and convertible, resulting is a low cost of capital. If they raise $830M, the money could be budgeted as follows:
1. DOE loan = $450M
2. Supercharger network @$250,000 per site with 4-6 chargers. Tesla could deploy 200 sites in the highways to cover the US at a subtotal of $50M. Europe could get 25 sites, China 15, Japan 10 for a subtotal of $25M. Total Supercharger investment $75M.
3. Model X - Tesla would need a separate assembly line complete with sheet metal cutting, stamping, extrusion, welding, painting, assembly and testing. Drive train manufacturing would have to be expanded to add front motor production, etc with increased automation. Model S manufacturing equipment cost roughly $500M. I read that Tesla has spent around $200M so far on Model X dies, presses, etc. Conservatively, they would need additional $200M since some manufacturing is shared with Model S like motor, battery, etc.

Leave approximately $100M is reserve.

As a shareholder, I would like Tesla to stay independent. They do not need the bureaucracy of Apple, Google, etc. Elon needs to be free to pursue his vision. Except for the Mars thing!

jk;
Master of its own fate, Musk captain of his own ship. There is lots of fine print about timing and ownership etc. in the footnotes to the loan -- monitored by bureaucrats.

lotus;
dilution at core is value per share. If the assets and equity increase but the # of shares doesn't (as much), then anti-dilution is happening.

Any information about the date of the relase of the capital raise details ? Can i subscribe some new shares also if i live in italy ?
maybe it's a stupid question but it's the first time for me that i partecipate at a capital raise..

@Bubba

Good notes but I would suggest a few modifications:

1) The original loan was $450m and I know that the new issue is also $450m but they have been making payments for a while so I would assume some of that principal has already been paid down.

3) The original budget to build a factory for Model S (before the NUMMI purchase) was $42m. I doubt it will cost anywhere near your projections to build the X. I toured the factory and they can use their current aluminium stamps, they just swap out the new dyes and molds for the X. Their robots are programmable for assembly as well. In other words, much of their capital expenditures for X are already in place.

Much of this capital will go towards service center expansion and more galleries.

So I think they will have a lot more than $100m cash on hand.

I think the capex will be for the GenIII, mostly.

Brian H -- more like delayed dilution...

They'll also add 14.6m to cash since this prefund wont't have to paid to doe on jun15.

After all said and done (doe loan paid), they could end up with 350m (or more) extra cash to add to operations that they didn't project in Q1 report.

Am pretty excited to see how this cash (and freedom from doe loan) will be utilized and how big tent pole projections change as a result...

Hoping for some insight at stockholder meeting jun4.

jhk2014, I'd hope the money would go to capex and reserve, not operations. Operations should be profitable or at least self-sustaining.

jk;
If the cap raise adds proportionately more (directly or indirectly) to the company's inherent worth (which is surely the intention) than the % expansion of outstanding shares, then each share represents a larger $$ value, as the company has grown. I have a hard time calling that "dilution". The pie is larger by more than the share pool is.

Brian H +1


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