Tesla's (NASDAQ:TSLA) announcement last night that it was conducting a secondary offering to raise external capital came as no surprise, particularly after the company set investor expectations earlier this month that it would need more money for the aggressive new production ramp. The offering itself was widely expected, but what was less clear was how much Tesla would seek to raise, as well as how the capital raise would be structured.
We now know that Tesla is looking to raise $1.4 billion in fresh capital, but that figure could potentially climb to $1.7 billion if underwriters exercise all options dependent upon investor interest. On the conference call earlier this month, CEO Elon Musk implied that Tesla was considering various ways to structure a capital raise, potentially including debt:
So it's going to make sense for us to raise some amount of money, some combination of equity and debt, and to make sure the company has a good buffer of cash on hand. I think it's important for de-risking the company.
Despite the fact that equity capital theoretically has higher implicit costs associated with it, I argued that Tesla should pursue an all-equity offering instead of adding any lower-cost debt to the mix. I'm glad Tesla agreed.
First off, let's just acknowledge that the capital raise is already a positive event in terms of reducing overall financial risk. This is just as true now as it was for the 2015 secondary offering, which was done to help fund Model X-related tooling and capital expenditures.
I'm just relieved that Tesla didn't decide to take on more debt, since the company already has enough of a debt burden. As of the end of last quarter, Tesla had a total of $3.1 billion in long-term debt and capital leases (including current and non-current). Net interest expense continues to weigh on results, too, coming in at nearly $40 million last quarter. Tesla also has a bunch of convertible notes already outstanding.
Meanwhile, the dilution associated with this secondary offering will be quite manageable for existing shareholders. It should only represent an increase in outstanding shares of about 5% to 9%, depending on how things play out. Considering the stronger financial position that the offer will bring, that dilution will be well worth it.
Show me the money
The money was really the only potentially limiting factor for Tesla's plans. Short of some act of God striking Elon Musk dead in his tracks, he will not stop or give up. Now that the money's in, there is very little standing in Tesla's way.
That's not to say it will be easy by any stretch. Quite the contrary -- it's going to be incredibly difficult. And Tesla undeniably needs to improve its quality controls and manufacturing processes, but the Audi exec that it just poached should help on both of those fronts. Independent of whether or not Tesla actually hits its aggressive target, it will still be putting up impressive growth rates either way.