Breakingviews - Tesla’s $2 bln capital raise repeats sins of past

A Tesla Model X vehicle is charged by a supercharger outside a Tesla electric car dealership in Sydney, Australia, May 31, 2017. REUTERS/Jason Reed

NEW YORK (Reuters Breakingviews) - Tesla’s $2 billion capital raise is repeating the sins of the past. The electric-car maker on Thursday unveiled plans to sell shares and convertible bonds for the first time in two years. That might be enough if Chief Executive Elon Musk can get vehicle sales to rebound quickly. But that’s the kind of hubris that put Tesla in its current fix.

Musk had previously said the company would generate enough cash on its own, but the $702 million loss it reported for the first three months of 2019 suggests otherwise. Musk duly conceded that might be time to raise capital, but also claimed last week in a call with analysts that not doing so earlier had been an attempt to encourage a healthy “Spartan diet.”

Trouble is, Tesla looks to need more than it’s raising. The company has been backloading its capital expenditure, spending just $280 million last quarter. That means forking out another $2.2 billion in the next nine months to meet Musk’ projected target. Meanwhile, it is likely to lose money during the current three-month reporting period. And a U.S. federal tax credit for customers, halved earlier this year, will be halved again at the end of June.

If Tesla can power through these deepening potholes, the $2 billion may suffice. And using convertible bonds for two-thirds of the money increases his options: Tesla shareholders won’t be diluted as much and the company gets what amounts to cheap debt. Better sales of cars would push up the stock price, fill the coffers with cash and allow the company to use either currency to repay investors.

Tesla’s recent problems, though, show that it’s smarter to have far more cash on the books than needed – as well as to stop overpromising and underdelivering on sales goals. Concerns about dwindling cash, let alone Musk’s botched attempt last year to take the company private – have hurt both his reputation and Tesla’s stock price. This week’s capital raise will happen at almost a third below the firm’s stock price after it reported full-year earnings for 2017, for example. Musk’s U-turn on raising capital is no sin, but failing to raise enough would be.


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