Tesla Raises $2.4 Billion In Capital; Is The Company Desperate?

Tesla Raises $2.4 Billion In Capital; Is The Company Desperate?
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Whitney Tilson’s email to investors discussing Tesla Inc (NASDAQ:TSLA) raises $2.4 billion in capital; Is Tesla desperate?; Taking a closer look at the deal.

***I just got back from Omaha from the Berkshire Hathaway annual meeting and am at the Ira Sohn Investment Conference today. Look for my thoughts on both later this week in Empire Financial Daily.

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In the meantime, I'm sharing an interesting note my longtime friend and former business partner Glenn Tongue sent me about Tesla's (TSLA) recent $2.35 billion stock and bond sale. Glenn spent two decades as an investment banker on Wall Street, so he's an expert in the various ways companies can raise money. He has some unique and important insights on Tesla's complex financing that aren't being fully appreciated by analysts or investors, which he's allowing me to share with you today. Read on for the details.***

I (Glenn) love going to the movies. And even though I know it's not good for me, nothing is better than getting a big bucket of popcorn and a medium Diet Coke. But the prices never seem to stop going up – it's now $14!

Yesterday, while waiting in line for the Avengers movie, I saw that the theater was offering a combo pack – a large bucket of popcorn (worth $8) and a large soda (worth $8) for just $12. But then I had an idea: What if I sold half of my Diet Coke to the next person in line? The medium soda, half the size of the large, cost $6. So to make it worth his while, I could sell it to him for $3.

This would be a good deal for both of us. I would be left with my bucket of popcorn (worth $8) and a medium soda (worth $6) and would pay just $9 for it after my side transaction. And the guy behind me would get a medium soda for half the price. Only the theater would lose out... It should have received $14 from me and $6 from my new friend but would ultimately get just $12.

Why am I telling you this story?

Because a similar set of transactions played out with Tesla last week when the company sold $1.6 billion of convertible bonds and $750 million in stock.

A convertible bond pays an interest rate (in this case, 2%) and can be exchanged for a fixed number of shares if the stock rises (in this case, if the stock rises to $309.83 from the issuance price of $243). Convertible bond buyers appear to get a good deal – in the downside scenario, they're senior to shareholders and receive interest and principal upon maturity (albeit at a lower interest rate than traditional debt). And if the stock soars, they can convert their bonds to shares and benefit from the gains above the conversion price.

But as with seemingly everything associated with Tesla, things are not what they seem. While bulls cheered what seemed to be a successful offering, I actually think this financing revealed what a desperate situation Tesla is in. Let me explain...

Using the analogy above, Tesla is the movie theater. It sold the combo pack (convertible bonds and stock) to underwriters (me), who sold all of the popcorn (the convertible bonds) and some of the soda (stock) to the guy behind me in line (investors).

But here's the kicker: The underwriters sold half of the soda (stock) back to Tesla for more than Tesla originally sold it. The convertible bond buyers did well. The stock buyers did, too. Only the movie theater (Tesla) lost out on the deal.

In reality, it's more complicated than that, and the math is tricky... But the bottom line is simple: The underwriters and investors made money at Tesla's expense.

So why did Tesla do it? Because it desperately needed the cash and had no other way to raise it – other than issuing super-expensive capital.

Let's take a closer look at the transaction using the numbers from the prospectus. The company issued $750 million in stock (approximately 3 million shares at a price per share of $243). It also issued $1.6 billion of convertible notes with a 2% interest rate. The note holders can convert the notes into stock at a share price of $309.83, ultimately representing 5.2 million shares.

But here's the key: Along with the offering, Tesla paid $413.8 million to purchase a call option. The stated purpose was to offset the dilution the company would incur if the convertible notes convert into stock.

Think of a convertible note as debt with an option to buy the stock. We can segregate these components of value in the convertible bond. In this case, if the value of the option is the $413.8 million, then the bond is worth about $1.2 billion ($1.6 billion less the $413.8 million). With these numbers, Tesla's effective interest rate on the bond component is 8.5%. In other words, Tesla in effect just issued an 8.5% bond.

Why would Tesla go through so much trouble (and pay the banks such high fees) instead of just issuing an 8.5% bond? Simple: Few investors want to buy huge amounts of debt in a risky, money-losing company like Tesla.

The convertible bondholders have no such risk because they have (or will soon have) shorted the stock against their convertible bond. If the company sinks, they'll make money on the short position. And if it succeeds, they'll make money on their convertible bond. It's a risk-free 8.5% return for them.

But Tesla bought the $413.8 million hedge from the underwriters – the people who repackaged the stock that was purchased in the offering. Yes, the same stock that Tesla sold in its equity deal was repackaged as a call option that Tesla bought... in effect, a round trip for that stock.

For dealers to create the hedge for Tesla to buy, they need approximately one-third of the shares (1.73 million) underlying the convertible bond. Let that sink in... 1.73 million shares out of the 3 million issued – more than half of the entire stock offering – were required to repackage a security to sell back to Tesla! This underscores what a difficult time Tesla had finding investors.

The rest of the transaction falls into place from there. There wasn't much stock left to sell, so the underwriters went to existing shareholders and convinced them that this transaction would give the company some breathing room. That's good for the stock, and existing shareholders are already believers.

As for the convertible, that's easy to place as long as it's possible to short the underlying stock. And of course, the underwriters are happy... they make $30 million in underwriting fees and only they know how much Tesla overpaid for the hedging transactions. While I don't know the exact amount the company overpaid, keep in mind the negotiations were between a first-deal, novice 34-year-old CFO and veteran dealmakers at Goldman Sachs (GS).

In addition to the structure of the deal, one important element of this issuance really troubles me: In the prospectus, the company calls itself a manufacturer of cars and solar-energy systems.

However, if you listened to the single sales call for the deal, which was only open to large, well-connected funds, Musk stated that the manufacturing of cars and solar-energy systems is simply a "backstop to value," and that Tesla's path to a $500 billion market cap is via autonomous driving and robotaxis. This concept is nowhere to be found in Tesla's publicly filed selling document. This is a blatant violation of U.S. Securities and Exchange Commission ("SEC") rules to selectively share highly material information.

In light of this, why isn't the SEC blocking the sale of these securities? Because Tesla did a transaction that the SEC doesn't review...

In my many decades on Wall Street, I have never once seen a company present one business plan in their regulatory filings while privately pitching an entirely different one to select investors. This behavior is outrageous, and we'll see if Tesla's acquisition of Maxwell Technologies gets new scrutiny in light of this brazen sidestepping of regulations.

Once you understand the details of this financing, it becomes clear that Tesla was truly desperate. While the structure was clever and allowed the company to raise much-needed cash, it paid a very high price.

The cash gives the company a few more quarters to try to turn things around, but given the abysmal first quarter and downward trends, I wouldn't want to own this stock. Despite the ever-changing narratives, Tesla has never had a profitable year. I'm willing to bet they never will.

Thanks for your contribution, Glenn!

Best regards,


Updated on

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)www.valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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  1. I definitely think he outfoxed Tilson, but that honestly isn’t a tall order. Tilson makes money once per decade. GS is likely going to mostly make money from this deal by selling derivatives to banks dealing with Tesla’s suppliers.

  2. I think your analysis is faulty. Look at it differently, that the bond buyer is buying a 2% bond with an option to buy the stock at $309.83. So Tesla is actually selling the stock at $309.83. It will receive a premium of $201,000,000 if and when the “option” is exercised for giving the option to purchase to the bond holder. If the bond holder wanted to buy such an option from a Wall Street option dealer, they would expect to pay a premium of 20% for the first year and about 10% per year thereafter, another 40%, a total of at least 50% maybe 60% above the $243 price of the offering. So the bond buyer is getting a cheap option ($67/shares versus market value of $120). Because the bondholder is getting a good price for the option, she is willing to take a 2% interest rate, versus a 4.83% rate Tesla might have to pay in the junk bond market for a five year note. That is a savings of $225,000,000 over the five years. That means that Tesla got a better deal than it could if it sold the bonds for a 4.83% rate and also sold a five year option to purchase the stock at $243. It looks to me as if Tesla crafted a deal that will save them $225 million in interest costs while effectively selling stock at $309.83 per share when the stock was $243 per share!

    Now as to Tesla buying an option to purchase the shares they will sell to the bondholders at $309.83, they are apparently paying $413.8 million. The information provided doesn’t make it clear at what exercise price the option Tesla purchase would be; it could be to purchase at $243 and thus the premium paid is very close to the 50-60% premium demanded by the option markets for such a long term option. That would mean that Tesla would be selling stock they purchased through the $413.8 million option for $381 per share to bondholders for $309,83 for a $71/share loss; but they saved $75/share in interest over the same period. The way it looks to me is that Tesla made one heck of a good deal, getting the certainty of a lower interest rate for 5 years which will result in either a $225,000,000 savings if the stock doesn’t rise to $309.83 within the five years, or they will make $4 a share net if the stock does rise above $309.83, but they will in any case suffer no dilution!

    Dumb like a fox that 34 year old, eh?

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