Capital Raise

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.

jk2014 | 15 mei 2013

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?

TuxMask | 15 mei 2013

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

lotusguynyc | 15 mei 2013

Well, that answers that question!
Registration statement

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? | 15 mei 2013

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.

holidayday | 15 mei 2013

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.

Digisats | 15 mei 2013

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.

danielccc | 15 mei 2013

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.

danielccc | 15 mei 2013

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.

danielccc | 15 mei 2013, 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.

jk2014 | 15 mei 2013

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.

danielccc | 15 mei 2013

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.

jk2014 | 15 mei 2013

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

risingsun | 15 mei 2013

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.

jk2014 | 15 mei 2013

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...

jk2014 | 15 mei 2013

The Star Wars saga of announcements...

jk2014 | 15 mei 2013

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

lotusguynyc | 15 mei 2013

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....

danielccc | 15 mei 2013

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.

danielccc | 15 mei 2013

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.

danielccc | 15 mei 2013

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.

Bubba2000 | 15 mei 2013

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!

Brian H | 15 mei 2013

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.

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.

Tesla Lover | 16 mei 2013

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..

JZ13 | 16 mei 2013


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.

Brian H | 16 mei 2013

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

jk2014 | 16 mei 2013

Brian H -- more like delayed dilution...

jk2014 | 16 mei 2013

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.

danielccc | 16 mei 2013

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

Brian H | 16 mei 2013

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.

JZ13 | 17 mei 2013

Brian H +1

jk2014 | 17 mei 2013

Wait till C notes hit 35%. Pool turns into ocean.

jk2014 | 17 mei 2013

But who really cares at this point. They raised 1b on the fly! This is huge for mid to long term.

jk2014 | 17 mei 2013

Does anyone know of any other CEO that has put so much of his personal wealth on the line in an offering?

Does anyone know of such a large follow on offering has ever happened from a similar cap (or bigger) company?

I'm scratching my head here...

Brian H | 18 mei 2013

The 100M is <5% of Musk's net worth.

lotusguynyc | 18 mei 2013

Congrats to the management team, very smart move raising $1 bil plus at this valuation. All of us shareholders owe Elon a big thank you and debt of gratitude for investing in this round as that is what made the valuation higher than when it was announced. In all my years of investing I have never seen a secondary price higher than when it has been announced. Perhaps it happened, but I never saw it !

Brian H | 18 mei 2013

I think it happened on the previous capital raise, too.

Bubba2000 | 18 mei 2013

JZ, per the balance sheet, Tesla invested approximately $500M for the Model S in equipment. I was listening to the CC and my understand was the Tesla was modifying Model S to make it easier to manufacture with tighter tolerances... I think it is like incorporating "lock and key" features in parts to facilitate assembly, welding, etc. Just speculation on my part.

I read that Model X manufacturing will cost an extra $200M. I think they will have to have separate stamping presses, extrusion, welding, assembly line, etc. Otherwise, it is not practical to swamp dies that weigh over a ton and aligning them takes time and money.

The enabling tech for Gen III is battery. They need a battery with double the energy density at half the cost. This will take time. Over 5 years in my opinion, especially to reach mass production and cost targets.

Meanwhile, Tesla can sell 100,000/year Model S+X in the US, Europe, Japan, China. They need national Supercharge networks, Service, etc. Prices could drop with economies of scale. 500 mile battery at the price of the current 85 KW-hr battery. Regular 85 KW-hr could go for $65k with tech package, leather and SC use. Make $1B net profit/year.

Now Tesla has >$700M after paying off the DOE loan.

jk2014 | 18 mei 2013

Bubba2000 -- what about an 85 at half the weight? What range would that get? I bet over 300. I think it's just a matter of scaling battery production to get the price down to overall 30K point. Doesn't have to go 500 miles right of the bat (maybe it will, who knows with improved software).

Just have to get a compelling geniii out there.

Think after a year of MX on the market, the geniii will be ready to go. Especially with the new influx of funds.

I think Tesla is getting a reputation as being on the cutting edge producing a car that gets better the longer you own it. I think people will trust it will improve range and extend the supercharger network at the same time.

The market is more then ready for Geniii right now. Just a matter of prepping production/organization to be ready for it. And I think that is sooner then later now.

negarholger | 18 mei 2013

Jk2014 - but TM is not ready yet.
Today TM can build Gen3... take 60 kWh battery and improve efficency by ~30% and you have 265 EPA. How to get 30% - smaller car (drag), less weight, 200 hp engine ( MX front motor), narrower tires, etc.
What is missing (TM not being there) ?
- 50% cost reduction
- inter city charging structure ( super chargers )
- service
- mature manufacturing team and processes
- manufacturing equipment
- battery supply
- smooth delivery process
- etc
The MS and MX need to earn the money and build the above. Production you can not turn on like a faucet. It takes years to ramp up production. Worst thing would be... Here guys this is Gen3 and because demand you have to wait 5 years to get one. Also by that time the design is way outdated. I think Teslas time table is very smart.

Bubba2000 | 19 mei 2013

I agree with Kleist's assessment. Tesla is working to optimize Model S, X design to reduce manufacturing cost as wells as optimize the supply chain, logistics. However, GenIII will need batteries with lower cost/KW-hr and higher density. Higher density means lighter car and low KW-hr requirements. I think it will be minimum of 40-60 KW-hr to get the necessary range. Tesla is shooting for a price range of $30-40k which is going to be a challenge.

In terms of Tesla stock, I think the max valuation will be when version 3.0 of Model S and X hit the market with a 500 mile battery, safety features like collision avoidance, smart cruise control, refined interior, etc. Gen III will be announced and the stock will be priced way up there... probably market cap around $100+B. Competition will be catching up, just like it did with Apple. By then, it may be time to take money off the table. I suspect GenIII margins will be compressed, just like it happened with PCs, laptops, etc. I want to be out long before then.

With $800M after pay off the DOE loan, Elon has the resources and he is not going to stand still. He has an incredibly successful track record.

jk2014 | 19 mei 2013

How much cost/kwh will be reduced when Tesla starts putting in huge (30k car/year) product orders to Panasonic (and other battery related suppliers) soon?

How many suppliers do you think will bend over backwards now to work with Tesla? I think costs will come down faster then you might think.

Everything is negotiable, especially now Tesla is making waves and will be a fantastic customer to supplier's bottom line.

It will take time to build out Tesla's organization to meet Geniii demand. The preparation of Geniii production infrastructure is the opportunity beginning to take shape this coming year...

Learning through 1 to 2 years with MS and MX should give enough prep I feel.

negarholger | 19 mei 2013

50% battery cost reduction - MS uses 8000 cell, Gen3 uses 4000 cell ( in bulk cost per cell approx the same )
What cells do you need ? Today 85kWh / 8000 = ~11Wh per cell, Gen3 60 kWh / 4000 = 15 Wh per cell. So only about 40 % more capacity per cell ( today Panasonic is already having ~13 Wh cells - not sure if they are good for car applications ).
Establishing a new production is always the same ( I did 9 high tech factories in 20 years )
- new team takes 2 years to reach first level of competence - folks actually know what their job means
- another team 3 years to mature - having depth in the mfg operation meaning multiple people can do the job
Guess what : 2012 MS, 2014 MX and 2017 Gen3 = 2 years + 3 years. Somebody at TM read the book !
I bought stock and made a reservation once I heard Elon's Oxford seminar - he deeply understands how to actually make things ( manufacuring ). TM's ramp up plan is right on point.

jk2014 | 19 mei 2013

But has any of your factories scaled from 0 units/week to 400 units/week in 6 months? It appears to me that one must take into account the force multiplying factors of intense motivation and learning of a core team over a production ramp such as this.

Many, many people at Tesla have developed core competencies very quickly. These same people will train and develop a cadre of new technicians in an efficient manner, etc. The level of knowledge is extremely good right now and I think that alone does wonders to accelerate scaling.

I feel Tesla is the hottest company with the hottest stock it highly incentives employees to stay for a long time. I believe other car companies will have a difficult time persuading managers/technicians/executives/engineers to leave. Also, don't think their is a risk of talent starting there own car company either. Turn over should be very low.

The icon CEO with a highly developed vision is another special force multiplier.

Therefore, I feel the standard protocol of 2 years/3 years might not apply exactly to Tesla.

negarholger | 19 mei 2013

And by the way... When I picked up my car in March we toured the line. To the untrained eye it might look impressive, but all I saw were inefficencies ( bad habit of mine )... they have ample opportunity left. If TM can brake even with the production line in 1Q then 25% GM is in easy reach by YE.

negarholger | 19 mei 2013

Jk - I have done factories that ramped from 0 to 200 a week in 3 month and others that ramped from 0 to 2 million a week in 6 month. I have worked in factories that make 2-3 million pieces a day - and all highly complex processes. The problem with cars is that they are big and take a lot of space.
It is not the engineering competence... what needs to grow is the manufacturing competence. To give you an example: my car was in service next to the factory and needed a small spare part. It took 15 days to get the spare part. I am currently in a mature mfg line, if I need a couple parts the mfg manager can tell me from top of his head in 2 seconds if he can me the part or not ( he is sure about his build plan and what he has ). Ask the same question to an new manufacturing team and it takes 2 weeks to get an answer ( they need to go back and read their plans and re-calculate the inventory ). I was just smiling when my car was 15 days waiting for one part.

negarholger | 19 mei 2013

Jk - but Tesla is following the protocol. I agree motovation is a strong driver - without it would even take longer.
The penalty is high when you do not do your due diligence. Our first factory in China upper management thought we should do it faster... Result in the end we lost 2-3 years and billions of dollars because the mess they created... Big people got fired for that disaster.

jk2014 | 19 mei 2013

I agree, an effective training program to develop mature manufacturing personnel is critical to scaling efficiently. Continuous and concurrent. Should be called Tesla university. Take the best talent off the line, bring them into train new manufacturing techs in what they need to be good at right now. Have them go through scenario simulations, certification, etc... Cycle talent off and on the line all the time to bring in current knowledge. Hire/train personnel at incremental levels proportional to targeted unit output. Have career development progressions. Certifications to get promoted, etc... Training program should be integral to maintaining core competencies. Especially in such the dynamic and continuous growth environment of Tesla.

I feel Tesla will do this (or does). There have been many, many mistakes and problems already and I bet your example of lack of knowledge happen everyday and may take the expressed 2year/3year maturation. I don't doubt it will. But, also have to look at the automation process (machines doing labor), having an accelerating effect on production capability in addition to a large, mature human knowledge base. And motivation and quality of labor force being hired. Tesla is emerging as a highly desired brand. I feel this is important in accelerating maturity. Bottom line, line workers will pay attention. Take notes. Check their answers twice. Minimize their mistakes. Want to get better. I ask you, have you had such a high level of brand heat and respectability behind you when hiring/training/maintaining your staff and personnel? This seems like special situation, and it will reflect on through the quality of personnel and speed at which this personal can adapt and develop.

I just feel that Tesla will be ready for GenIII sooner than later (2015), and think the metrics will demonstrate this in the next couple years. This current 1.02b offering has changed my opinion.

jk2014 | 19 mei 2013

Clearly they will need to hit critical milestones a long the way. Maintain highest safety standards. I feel they will meet these requirements more efficiently then expected given Tesla's as a highly sought after work place and potential to continue being a great work place for many years to come.

danielccc | 19 mei 2013

I am not seeing Gen III in 2015. Remember, Model X is end of 2014.

2015 would be a year or less after that, for 10X the manufacturing rate!

Instead, 2015 might see a supercar and/or Model S update, to insure the car does not grow stale while they spend the next two years focusing on Gen III.

jk2014 | 19 mei 2013

danielccc -- you might be right. I think it would be pressing it to get it out by the end of 2015.

However, I feel this capital raise helped change/accelerate things a little. Might be able to execute the plan to build out the rest of the Fremont factory now. If they can get the factory itself physically ready for 200k/year capacity, while prepping a core GenIII production work force, then it may just becomes a matter of multiplying the MS/MX 50k/year organizational structures. MS and MX production will probably produce 50k/year for about a year. That organizational structure can be how they build out GenIII organization. (50k/year org times 4). It will be just a matter of finalizing the GenIII production model, then plug into developed/tested 50k/year production organizations. Maturity on an organizational structure level will just as proficient as it is for the MS/MX line. Therefore, I don't feel it would be much of leap to establish a safe competent geniii in the next 2-2.5 years.