Expanding Capital Raise to Meet Demand
Tesla has upped it’s capital raise from $1.15B to $1.38B after investors indicated higher demand for the offering. The company initially planned to offer 968,993 common shares and increased that to 1,335,878 shares of stock, raising an additional $350M. In addition to an increase in the common stock offering, Tesla also raised $850M from a convertible debt sale with an additional $127.5M available to the underwriters. The company initially intended to offer $750M in debt and raised that by $100M to meet demand. We will know within 30 days whether the underwriters decide to exercise their options to purchase, which would net Tesla an additional ~$180M. If the underwriters exercise their options, then the total proceeds of the sale will net $1.38B. This capital raise is intended to “de-risk” the company’s financial condition as they focus on getting the Model 3 into production this year.
Tesla’s bond offering of $850M consisted of 2.375% Convertible Senior Notes due March 15, 2022. Compared to previous convertible bond offerings, Tesla increased the interest rate on the bonds while lowering the “conversion” premium. The conversion premium allows for the bond holder to exchange their bond for common stock, Tesla has set the price of that conversion at $327.50, which is roughly 25% above current market value. Previous convertible bond offerings had a conversion premium of 42.5% above their respective market values and interest rates of .25% and 1.25%. (This analysis does not look at the debt offering SolarCity had before the Tesla-SolarCity merger last fall.)
“Secret” Investor Call
On March 16, a user on the Tesla Subreddit revealed that Elon Musk and other company officials were holding a conference call with the investors directly involved in the sale of shares and bonds. Tesla did not announce the call on its Investors Relations page nor provide a transcript of the call.
According to reddit member electricmusk who was affiliated with the raise and attended the call, Elon Musk revealed that there would be no “beta” version of the Model 3. Instead, the company is going straight to an “early release candidate.” In the industry, that normally refers to cars built on the actual assembly line that will be used for normal production.
If true, that suggests the Model 3 production line is now complete and ready to start producing cars. Later in the conference call, Musk is heard saying “we will be driving it (the early release candidate) within a week or two.” Musk reportedly said that advanced analytical techniques are allowing the company to skip the usual beta phase. He promised the Model 3 will have higher initial quality than either the Model S or Model X because of those analytical tools.
The quick transition to early release candidate cars has some people on Reddit concerned. john_atx, a first day Model 3 reservation holder, explained it this way.
“No, it does mean something. Start of production is July, and they don’t have any cars to test now in the middle of March. So let’s say they can start driving their cars by April. If an issue comes up, they have weeks to get it resolved. Normally you have a fleet of production intent cars driving in all conditions to get data. Tesla won’t have enough time to find the problems and implement corrective actions before Start of Production.”
Those who were able to listen in on the conference call report one other interesting tidbit. At one point, Elon Musk is heard to say — albeit indistinctly — that Tesla will transition to the 2170 battery cells for the battery packs in its Model S and Model X cars “by the end of the year,” according to reddit user electricmusk. Tesla’s 2170 lithium ion cells are currently being manufactured at Gigafactory 1 and being used in its commercial and home energy storage systems. The cells will also be used in the upcoming mass market Model 3 sedan.
Come join the discussion on Model 3 as Tesla prepares to put the vehicle into mass production.