Ich stelle das mal so ein, muß dazu erst
noch ein paar Rechnungen anstellen bzw durchdenken.
Jedenfalls ist es mE für einen Issuer
ziemlich ungewöhnlich Calls im Zuge eines Convertible zu kaufen, das führt den Zweck eines solchen
einigermaßen ad absurdum. Allerdings erinnere ich mich Tesla hat das schon vor einigen Jahren auch mal
gemacht.
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.