There had been quite a bit of uncertainty in recent quarters over whether or not Tesla (TSLA -3.40%) was going to raise more capital ahead of the Model 3 launch. The company raised $1.7 billion in its May 2016 secondary offering after underwriters exercised all of their options. That put Tesla in a relatively more comfortable financial position at the time.
The following month, it announced its ambitious and controversial proposal to acquire sister company SolarCity in an all-stock deal, which many expected to be cash flow negative. This raised the notion that Tesla may need to raise capital yet again. Tesla was able to mostly address this concern by aggressively shifting away from solar leases and toward sales, which pulls forward both revenue recognition and cash flow; Tesla's solar operations generated $77 million of positive cash flow last quarter.
Image source: Tesla.
Still, it wasn't clear until yesterday what the company was planning to do. Then Tesla announced concurrent stock and convertible note offerings, expecting to raise $1.15 billion.
Mixed messages
In the S-4 related to the SolarCity acquisition, filed in August, Tesla said that it was planning to raise more capital (emphasis added):
While Tesla expects that its current sources of liquidity, including cash and cash equivalents, together with its current projections of cash flow from operating and retail financing activities, will provide it with adequate liquidity based on its current plans through at least the end of the current fiscal year, Tesla is currently planning to raise additional funds by the end of this year, including through potential equity or debt offerings, subject to market conditions and recognizing that Tesla cannot be certain that additional funds would be available to it on favorable terms or at all.
In October, CEO Elon Musk backtracked on that expectation with a series of tweets.
Would also like to correct expectations that Tesla/SolarCity will need to raise equity or corp debt in Q4. Won't be necessary for either.
— Elon Musk (@elonmusk) October 9, 2016
@roger_kappler Probably not then either
— Elon Musk (@elonmusk) October 9, 2016
On the third-quarter earnings call later that month, Musk said, "It seems like we probably won't want to do a capital raise even in Q1. I'm not saying we won't, but probably not." Musk hedged quite a bit, advising to "take this with a grain of salt" and noting "that's not a promise" -- the statements just represented Tesla's view at the time. He added that it might make sense to "have a larger buffer and to de-risk the business."
On the fourth-quarter earnings call just last month, Musk had clearly warmed up to the idea:
So this is really a question of what is the risk tolerance of the company. Or how close to the edge do we want to go? According to our financial plan, no capital needs to be raised for the Model 3. But we get very close to the edge. So then that is probably not the best thing for shareholders on a risk-adjusted basis. So we are considering a number of options, but I think it probably makes sense to raise capital to reduce risk.
In other words, Tesla is saying it doesn't necessarily need the capital, but it would be helpful just in case.
