Tesla (TSLA - Free Report) shares have had a rough 2019, down more than 25% so far, even as the auto industry as a whole gained almost 9% and the S&P 500 has added 16%.
Tesla shares rallied 4% by midday Thursday however, after it was announced that the company had filed a shelf registration with the SEC to issue up to $2B in a combination of convertible notes and new equity shares.
The proceeds will be used to complete manufacturing facilities in China and bring the long-awaited Model Y SUV to market.
(The “shelf” offering means that a company gets approval for a new issue without a set timetable and once approval is granted, can issue the referenced securities as needed.)
Tesla CEO Elon Musk had been adamant over the past year about the fact that Tesla would not have to tap the public markets for cash - instead using the revenues from steeply increased Model 3 revenues to fund both operations and capital expenditures.
Musk himself volunteered that he would personally buy up to $10M worth of the newly issued shares, though that’s a proverbial drop in the bucket compared to the $12.5 billion worth of Tesla shares he already owns – about 20% of the company.
The filing included a $1.35B convertible note offering with an interest rate between 1.5% and 2% annually and a conversion strike that’s roughly 30% above the current stock price, as well as $650M in newly issued shares of the company.
An additional option issued to the underwriters to purchase an additional 15% could push the total value of the deal to $2.3B.
The full offering would result in the issue of between 2.7M and 3.1 M additional shares - and possibly up to triple that number if all the convertibles are exercised.
Normally that potential dilution of existing shareholder equity would result in a selloff in the stock, but this is Tesla after all, and instead of selling, investors gobbled up the shares all day, buying into broad markets that trended lower.
It seems that the markets view the move as the beginning of a trend toward more traditional fiscal management at Tesla.
Companies raise money all the time with all sorts of combinations of equity and debt. In general, it’s a fairly straightforward calculation – we need money for operations and/or investments. How much? When? What is the most efficient way to raise it?
It’s supposed to be a boring process that happens mostly in the Finance department, but Musk made not raising money a point of personal pride in a way that unnerved investors, who feared that he might influence otherwise sound financial decision making in support of his own ego.
The new proposed offering - along with the recent culmination of Musk’s disputes with the SEC over his Twitter communications – demonstrates a path toward a more conventional corporate management structure.
Judging by the reaction in Tesla’s share price, that’s a welcome change.
Elon Musk built Tesla into the company it is today based largely on the power of his own ideas, deep convictions and hard work, but as the company transitions from a tech innovator to a major global automaker, the demonstration of a little old-fashioned financial discipline is definitely a positive development.
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