Tesla chief executive Elon Musk is more than doubling the stock he will buy in a new public offering in an apparent bid to earn investors’ confidence as he tries to turn around his struggling electric car company.
Mr. Musk raised his latest investment from US$10-million to US$25-million on Friday as Tesla boosted the size of a note-and-stock offering to raise much needed capital to keep the company going.
On Thursday, when Tesla first disclosed the offering, it was valued at up to US$2.3-billion. But because of a positive response, the company on Friday raised the offer to as high as US$2.7-billion.
Mr. Musk likely raised his own stake to show shareholders that he’s taking the same risk that he’s asking investors to, Gartner analyst Michael Ramsey said.
“He’s put his own skin in the game,” Mr. Ramsey said.
But Mr. Musk also is guarding against dilution of his ownership stake, he added. Mr. Musk is by far the company’s largest shareholder, holding about 20 per cent of the company’s outstanding shares.
The offer, detailed in a filing Friday with the U.S. Securities and Exchange Commission, includes up to US$1.84 billion in notes that pay 2-per-cent annual interest and convert to Tesla common stock in 2024. Also included are more than 3.5 million new shares worth as much as US$866-million. The new numbers include underwriting brokers exercising their full options to buy additional notes and shares.
Last week, Tesla reported its cash balance at the end of the first quarter shrunk by US$1.5-billion since December, to US$2.2-billion. Mr. Musk said during a conference call that Tesla might need to raise capital again.
The company will use the proceeds to “further strengthen our balance sheet, as well as for general corporate purposes,” the filing says.
But the offerings would raise the company’s debt from US$9.79-billion to as high as US$11.63-billion, with the company admitting in its filing that it may not be able to generate enough cash to make all of the payments.
“If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive,” the company wrote in the part of the filing that discusses risk factors.
Tesla’s shares would have to reach US$309.83 by May 15, 2024, for the notes to be converted to stock. That’s a 21-per-cent increase over the current price. If they don’t hit that price, Tesla is on the hook to repay the notes largely in cash, according to the filings.
In a statement on the offering Thursday, Moody’s senior vice-president Bruce Clark wrote that the offering will give Tesla enough liquidity to pay US$566-million in notes that mature in November, plus provide cash to expand distribution of Tesla’s Model 3 in Europe and cover spending needed from softening demand for all three of Tesla’s models in the United States.
Moody’s kept a negative outlook and B3 rating on Tesla debt. That is six notches below investment grade.
In a March 30 note, the ratings agency wrote that the Model 3, Tesla’s lowest-priced model, currently sells for an average of US$55,000. To increase sales, the price has to drop toward US$42,000, and to make enough money to pay the bills, Tesla has targeted a 25-per-cent gross profit margin on the Model 3, Moody’s said. Currently, gross profits on a US$42,000 Model 3 are “materially” below 25 per cent, according to Moody’s.
“In order to achieve this margin target the company will have to undertake significant reductions in fixed and variable costs associated with the vehicle,” Moody’s wrote. “We expect that it will be a major challenge for Tesla to aggressively increase production/deliveries, shift the product mix toward the $42,000 price level, and simultaneously lower costs enough to achieve the 25% gross margin target.”
Tesla, Moody’s wrote, has no sustainable technical advantage over competitors. “Essentially all of the technologies incorporated in Tesla vehicles (or some similarly effective alternative technologies) will largely be available to competitors,” according to Moody’s.
The Palo Alto, Calif.-based Tesla lost US$702.1-million in the first quarter, among its worst quarters in two years. Sales tumbled 31 per cent in the period. Mr. Musk predicted another loss in the second quarter, but said Tesla would be profitable again by the third quarter.
The surprisingly large loss came after the company’s first back-to-back quarters of profitability.
Tesla has lost more than US$6-billion since setting out to revolutionize the auto industry. Mr. Musk expects that future profits will be driven by rising sales and the arrival of autonomous vehicles dedicated to a new ride-hailing service.
Shares of Tesla Inc. rose as much as 4.3 per cent to US$254.58 in Friday afternoon trading. They are down more than 23 per cent so far this year.