On 1st September, Tesla (TLSA) announces $5 billion capital raise through equity distribution agreement (selling more shares possibly dilution?). CEO Elon Musk previously mentioned that the company wasn’t interested in a new capital raise as he believed that TSLA was capable to finance its ambitious growth through its operations. WHY then did they want to raise money?

Is Tesla in trouble? Why is Tesla raising $5 billion now?

What happened on 1st September 2020?

Before we look at the possible impact, it is important to know what happen during the announcement.

Tesla announced today a $5 billion capital raise:

On September 1, 2020, Tesla, Inc. (“Tesla”) entered into an equity distribution agreement (the “Equity Distribution Agreement”) with Goldman Sachs & Co. LLC, BofA Securities, Inc., Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC, Credit Suisse Securities (USA) LLC, SG Americas Securities, LLC, Wells Fargo Securities, LLC and BNP Paribas Securities Corp., as sales agents (each, a “Sales Agent” and collectively, the “Sales Agents”), to sell shares of common stock (A), par value $0.001 per share, of Tesla (the “Common Stock”) having aggregate sales proceeds of up to $5.0 billion (the “Shares”), from time to time, through an “at-the-market” offering program (B) (the “Offering”).

We currently intend to use the net proceeds from this offering to further strengthen our balance sheet (C), as well as for general corporate purposes.

What does it mean?

This means that TSLA intends to sell shares (A) at their desired price level (B) until $5 Billion worth is taken up. They intend to use the money to pay off their long term debts (C). The above banks will be helping them sell their sales.

TSLA is current priced at $407. IF they plan to sell it today, they can sell approximately 12.285 million of shares. HOWEVER, they need not do so. They can wait until their desired price level (B) before selling. 

For example, if their desired price level is $1000, they will be selling 5 million worth of shares. Notice that they sell less shares for the same amount ($5 billion) when they wait for their desired price level to be sold. ($1000 is an illustration)

What about dilution problems?

When Tesla announced the capital raise, it was trading at almost $500 billion, $5 billion was roughly a 1% dilution. I do not think it is a major issue for shareholders.

Between the lines

Let me refer it back to desired price level (B). This means the TSLA can choose to sell at any time or even choose NOT to sell. This is like a free line of credit to them! It is as if it is an option to raise funds from the stock market without incurring debt (no interest). Personally, I think this is a greatest win to the announcement.

On a side note, it is normal for companies to raise funds from equity or debt instruments for expansion (example: build more gigafactories to increase production)

On a more speculative view, it will help with the inclusion of TSLA into the S&P500 by having more liquidity.

Final Thoughts

This is not a buy/sell recommendation. Personally, I think that Elon Musk is an expert in raising capital. I like his vision but have trouble understanding the valuation of TSLA. TSLA quick ratio is 0.92 (04 Sept 2020), I would prefer for it to be better. I have no positions in TSLA nor do I intend to start a position soon.

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