Tesla Launching Over $2 Billion in New Shares as its Cash Reserves Shrink
As Tesla Inc continues to burn through its cash reserves, the electric automaker is under pressure from Wall Street to raise funds and that's exactly what it is doing.
On Thursday, Tesla issues of new shares and debt worth more than $2 billion. Billionaire CEO Elon Musk is pitching in $10 million as the electric carmaker attempts to build up its cash reserves.
The company said in the filing that it would seek to raise $650 million in new shares and $1.35 billion in debt, with underwriters having the option to buy an additional 15 percent of each offering, potentially raising the proceeds to $2.3 billion.
"This was a smart move by Musk and Tesla to rip the band-aid off and go to the capital markets," Dan Ives, an analyst with Wedbush Securities said in a note.
The move is not entirely surprising, analysts have been predicting since the beginning of the year that Tesla would need to raise funds for its expansion plans, as it looks to become a mass-market automaker with the Model 3 and upcoming Model Y crossover.
Shares in the Silicon Valley company rose more than 5 percent on news of the capital raise plan, which follows Musk's hint last week that a fund-raising was imminent after Tesla lost $700 million in the first quarter. Tesla's stock price fell to $235.14 on April 26, the lowest level in two years, over concerns over falling demand for the Model 3, the company's first mass-market car.
"The growing worries around capital were a black cloud over the stock on the heels of the company's troubled March results and the choppy path ahead." Ives wrote in his note.
Tesla's first quarter results disappointed many on Wall Street last week, although Musk promised the company would deliver a profit again by the third quarter of this year. However, the company's big investments have it bleeding cash.
Tesla expects capital expenditures of $2 billion to $2.5 billion this year and about $2.5 billion to $3 billion annually for the next two fiscal years. It ended its first quarter with $2.2 billion in cash on hand.
Just last week, analysts said that Tesla would probably seek between $1 billion and $3 billion dollars, and that it would cost significantly more than it would have a year ago, when some on Wall Street were already calling for a capital raise.
A previous issue of shares in 2017 went at $262 a share, compared to the company's current price of $246. The yield on its existing $1.8 billion junk bond rose to 8.42 percent on Friday in anticipation of the new issuance.
Tesla has raised funds through bank loans, several rounds of equity sales, issued convertible notes, a junk bond sale, securitization of its vehicle leases and solar asset-backed notes.
The automaker is also looking to tap into China's auto market, the world's largest, as a path towards profitability. Tesla's Gigafactory in Shanghai would allow the automaker to avoid high import tariffs.
Tesla's Shanghai assembly plant is set to become the first wholly owned plant by a U.S. automaker since China relaxed rules that required automakers to enter into a joint venture with a Chinese partner. Previously, foreign automakers could own no more than half of thier joint ventures with Chinese partners.
Tesla is counting on the Model 3 for a large chuck of its future profits and any setbacks in delivering the electric car to global customers going forward could put the company in a tight financial situation.
Demand for the Model 3 in Europe remains high though. The Model 3 has become the best selling electric car in Europe since its introduction in February.
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