Tesla returns to Wall St as Elon Musk readies Model 3 rollout

Elon Musk needs to raise at least US$1.15 billion more to bring his more affordable Model 3 to market. Photo / Ted Baghurst

Elon Musk needs to raise at least US$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 late last year and Musk's warning to Wall Street that company coffers were "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 clean-energy company has captured imaginations on and off Wall Street even as Palo Alto, California-based Tesla has struggled to be profitable. Instead of falling after the capital raise announcement, Tesla stock is on the rise.

The proceeds from Tesla's offering of US$250 million in shares and US$750m 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 US$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 as it ramps up spending to introduce the Model 3. Tesla burned through US$970m in the fourth quarter and expects as much as US$2.5b 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 US$2b."

The offering is expected to price on Thursday after the market closes, according to a person familiar with the process.

While raising cash isn't critical to releasing the Model 3, it would probably be wise, Musk said on the February 22 earnings call. Tesla has reported losses in all but two quarters since its inception.

"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 per cent stake. He'll participate in the capital raise by purchasing US$25m 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 US$344.4m loan from a unit of Morgan Stanley. He has also borrowed US$279.9m from financial institutions that aren't involved in the company's offering and are secured by a portion of Tesla stock, the company said.

A separate Tesla filing Wednesday showed Deepak Ahuja, who's returning as chief financial officer, was granted options, plus restricted stock units with a market value of US$10.5m on March 13, two days before the capital raise was announced. After leading Tesla from the brink of bankruptcy through its 2010 initial public offering, Ahuja retired in 2015 and will return in April to replace Jason Wheeler, a former vice president of finance at Google.

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 US$41b 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 US$2b 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."