Please ensure Javascript is enabled for purposes of website accessibility

Tesla, Inc. Raises $1.2 Billion in Offerings

By Evan Niu, CFA – Mar 17, 2017 at 1:34PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The market is pricing in more risk following the SolarCity acquisition.

Electric-car maker Tesla (TSLA -8.62%) priced its concurrent stock and convertible note offerings last night, and the total capital raised came in at $1.2 billion, slightly higher than the $1.15 billion that Tesla had previously expected even after a 15% underwriter option. That $1.2 billion is the gross amount raised before factoring in underwriting discounts and other costs associated with the offering, some of which are not insignificant.

The total amount raised could climb to $1.4 billion if underwriters exercise all options. We'll find out in a few days if they do or not.

Tesla factory in Fremont

Tesla factory in Fremont. Image source: Tesla.

The equity

In terms of the common stock offering, it was priced at $262 and Tesla ended up selling 1.33 million shares, compared to the 969,000 it initially planned to sell. Underwriters still have options to purchase another 200,000 shares on top of that if investor demand is there. The net proceeds to Tesla after the underwriting discount are about $348 million. That puts the dilutive impact of the stock offering at 0.8% -- rather minimal.

The stock offering is pretty straightforward, while the convertible note offering is where things get a little bit more interesting and complicated.

The convertibles are pricing in more risk

The convertible notes due 2022 ended up pricing at a 2.375% coupon rate, with an aggregate principal amount of $850 million, up from the prior expectation of $750 million. The net proceeds to Tesla will be $840 million after the underwriting discount. The notes will have a conversion price of $327.50, which represents a conversion premium of 25% compared to current levels.

Compare those figures to Tesla's last convertible note offering from 2014 (underwriters exercised their options in full on that offering).

Maturity

Principal Amount

Interest Rate

Conversion Premium

2019

$920 million

0.25%

42.5%

2021

$1.38 billion

1.25%

42.5%

Data source: SEC filings.

The higher interest rate and lower conversion premium associated with the current offering show that the market is pricing in more risk associated with these notes. It's possible this is related to the recent acquisition of SolarCity, since the deal weakened Tesla's balance sheet, as it assumed quite a bit of its sister company's debt; Tesla had $2.7 billion in total long-term debt and capital leases at the end of Q3, which jumped to $6.8 billion at the end of Q4 after closing on SolarCity (not including solar bonds).

Additionally, Tesla is entering into hedge and warrant transactions to offset and mitigate any potential dilution should the notes be converted. But these transactions are expensive. Tesla says it expects to spend $131.5 million of the note proceeds to cover the costs of these hedges, which will only be partially offset from proceeds from the warrant transactions. That's a high price to pay, but the alternative is for shareholders to face even greater potential dilution if shares exceed the conversion price of $327.50.

In other words, Tesla is spending about 15% of the net proceeds from these notes on the related hedges, so it will only collect about $708.5 million.

Model 3 production is only four months away

If we add up the net expected proceeds from both offerings, after deducting the hedge expenses but before the possibility of underwriters exercising their options, Tesla will add $1.06 billion to its coffers to help reduce risk ahead of Model 3, which covers a good chunk of the $2 billion to $2.5 billion in capital expenditures that are planned for the new vehicle. With Model 3 still on track for production to begin in July, it's crunch time.

Evan Niu, CFA owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$242.40 (-8.62%) $-22.85

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.