On Friday, March 17th, 2017 Tesla (TSLA) announced the pricing of a secondary offering of 1.335 million shares at price of $262 per share, for a total value of $350 million. Additionally, the company priced $850 million worth of 2.375% convertible bonds, giving it a conversion price of $327.50 per share. The equity offering was upsized from an original value of $250 million, while the convertible bonds were upsized from $750 million.
The capital raise should not have come as a surprise to anyone; many investors had warned that the equity raise was coming. In fact, during the company's fourth quarter conference call, Elon Musk was asked directly about the possibility of a capital raise by Colin Langan of UBS. Musk respond that a raise was not needed for Model 3 production, but also said that the company was "close to the edge," was considering options and that it would make sense to raise capital to reduce risk. The possibility of a capital raise drove the shares from around $280 at the time of the earnings release to around $240 in the days that followed.
Confirmation of the capital raise gets the monkey off the back of TSLA. In fact, the deal was very well received by investors, given the 20 percent upsizing of the deal from the original offering of $1.0 billion to $1.2 billion. Trading in shares of TSLA following the announcement of the secondary offering, which happened after the U.S. stock market close on March 15th, tells the whole story. TSLA rose from $255.73 on March 15th to $262.05 at the close on March 16th. The deal was so strong that underwriters only gave it a $0.05 discount from the closing price on March 16th. The follow-through confirms the overall strength of the deal with the stock trading at a high of $265 and a low of $261.20, closing at $261.50.
These moves make it seem pretty clear that the market had been expected a secondary that was much larger than the one announced last week. If the deal had been bigger than expected, the stock would most likely have traded lower, not higher.
This secondary is a very positive step for the company as it continues to close in on the launch of the Model 3 in the second half of 2017. The company's plan seems to be on track, so stay tuned as the greatest Bull/Bear debate in the history of the stock market is about to get a little more contentious. (See also: Can Tesla Do The Impossible?)
Michael Kramer and the clients of Mott Capital Management, LLC own shares of TSLA. Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.