Tesla jolts market with $2 billion stock offering, SEC subpoena

Tesla jolts market with $2 billion stock offering, SEC subpoena

13 Feb    Finance News

Tesla Inc. surprised the market with the news that it’s planning to offer about $2 billion of common stock in an underwritten deal, but an initial negative reaction gave way to hopes it’s the right step considering the recent runup for the stock and the Silicon Valley car maker’s expansion goals.

Tesla stock TSLA, +4.73%  was down as much as 4.2% in early trading — it fell as much as 7.2% in premarket trading — before recovering to trade nearly 5% higher as the closing bell approached.

Chief Executive Elon Musk will participate in the offering by purchasing up to $10 million in new shares, Tesla TSLA, +4.73%  said in a statement. Board member Larry Ellison will also participate by buying up to $1 million in stock.

Proceeds of the deal will be used to bolster the company’s balance sheet and for general corporate purposes. Goldman Sachs and Morgan Stanley are underwriting the deal and have a 30-day option to acquire another $300 million in stock.

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“We are not surprised by the capital raise considering (Tesla’s) ambitious growth plans, including a new factory in Germany and a possible factory in Texas,” and also in light of the stock’s run-up and the fact it last issued equity in May at $243 a share, said Garrett Nelson, an analyst with CFRA.

Tesla shares have been on a tear, more than doubling in just three months, repeatedly setting fresh records as analysts turn more bullish on the company.

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“Recent speed bumps including a coronavirus-related delay in vehicle deliveries from its new China factory and the Model X recall likely factored into management’s decision to proceed with the offering,” he said.

Baird analyst Ben Kallo said the equity raise is about 2% dilutive to existing shareholders, but that the move was prudent given the recent run-up in the stock price.

Baird’s Kallo acknowledged, however, that issuing stock clashes with recent comments from the company, including from Musk on its last earnings call on Jan. 29.

“We’re spending money, I think, efficiently, and we’re not artificially limiting our progress,” Musk told analysts, according to a FactSet transcript. “And then, despite all that, we are still generating positive cash. So in light of that, it doesn’t make sense to raise money because we expect to generate cash despite this growth level.”

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The money will help fund Tesla’s future investment plans which include up to $3 billion of annual capital expenditures through 2022, said Kallo.

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“Importantly, we think the announcement could provide an opportunity for analysts to close out sell ratings and expect shares to trade up in the short term,” Kallo wrote in a note to clients. The analyst rates the stock as neutral with a $650 price target, that is below its current price of about $750.

The offering “will be a bit of a shock to some given the company talked about no need to raise capital on its recent conference call,” but it “rips the Band-Aid off and takes the doomsday cash crunch scenario some predicted down the road now off the table,” said analyst Dan Ives with Wedbush.

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“The size of this offering is larger than many had anticipated, but we believe it’s a smart move by Musk and the Board to take advantage of being back in a position of strength with the Street and focus on raising capital.”

Separately, Tesla released its audited 2019 annual report early Thursday, and disclosed that on Dec. 4, the Securities and Exchange Commission issued a subpoena seeking information concerning “certain financial data and contracts including Tesla’s regular financing arrangements.”

Tesla said the Department of Justice had also asked to voluntarily provide information regarding financing arrangements.

The company had two general counsels in 2019, and the most recent top lawyer, Jonathan Chang, left around Dec. 6.

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Also on Dec. 4, the electric car maker said the SEC closed its investigation into the projections and other public statements regarding Model 3 production rates. In the 2018 10-K filing, the SEC had issued subpoenas to Tesla in connection with Chief Executive Elon Musk’s statement regarding consideration of taking Tesla private and certain projections made for Model 3 production rates.

In the filing, Tesla said it expect capital expenditures to average between $2.5 billion and $3.5 billion a year in 2020 and 2021. That likely will “equate to weaker free cash flow than it has generated in recent quarters,” CFRA’s Nelson said. “We … continue to view the stock’s current risk/reward as unfavorable.”

Tesla shares have gained 151% in the last 12 months, compared with advances of 22% and 15% for the S&P 500 SPX, -0.03%  and the Dow Jones Industrial Average. DJIA, -0.28%  

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