Elon Musk bowed to the inevitable on Thursday and revealed plans to return to Wall Street for cash, seeking up to $2.3bn in equity and convertible debt to underpin Tesla’s balance sheet.
The planned capital raising followed news last week that the US electric car maker had burnt through $1.5bn in the first three months of the year, cutting its cash reserves to their lowest level since the start of 2016. Its shares rose 4 per cent in pre-market trading on Thursday on relief that Mr Musk was finally acting to repair its strapped finances.
The Tesla boss argued for much of last year that the company had become financially sustainable and would not need to raise more money, despite ambitious plans for new vehicles. It has raised cash separately to develop a plant in Shanghai, tapping banks in Asia for more than $500m this year.
However, after generating $1.8bn in free cash flow in the second half of last year, Tesla’s finances went into reverse in 2019. The calls on its cash included the repayment of a $920m bond issue.
Mr Musk’s change of course follows an erosion of confidence that has caused a 30 per cent fall in Tesla’s share price this year, with an 11 per cent drop since it reported bigger than expected losses last week.
Daniel Ives, an analyst at Wedbush who had been a strong supporter of the company but was among those who turned negative last week, called the capital raising “a clear net positive” for the company. Tesla “needed to take its medicine and clear the air of the very real investor worries” that it would not be able to meet upcoming calls on its cash, he wrote in a note. These include a debt repayment due in November, as well as development costs for new models including the Model Y and its first electric truck.
Mr Musk last week sought to justify his resistance to raising more money. “I don’t think raising capital should be a substitute for making the company operate more effectively,” he said on the company’s earnings call. “I think it is healthy to be on a spartan diet for a while.” He added, though, that the financial discipline had paid off and it was now time to consider tapping Wall Street again.
Tesla said Mr Musk would purchase $10m of stock as part of the fundraising.
Mr Musk’s return to Wall Street for cash comes nearly eight months after he announced on Twitter that he planned to quit the public markets entirely, with a buyout for which he claimed he already had “funding secured”. The SEC sued him over the claim, leading to a settlement in which Mr Musk agreed to restrictions on his Twitter use.
He has fought a running battle with short-sellers since then, and he told analysts on the earnings call last week that he would rather Tesla was private.
Tesla said it would offer $650m in common stock and $1.35bn of convertible bonds as part of the offering. The proceeds of the deal would rise by $300m if underwriters exercise an option to purchase additional securities. The money will be used to boost the group’s balance sheet and for “general corporate purposes”, it added.
The bonds that Tesla is selling are convertible into cash and/or shares at the group’s election, it said. It last issued common stock in early 2017 as it geared up for the launch of the Model 3.