Tesla raises capital two weeks after Elon Musk said it wasn’t needed

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Tesla CEO Elon Musk was definitive during the company’s January 30 earnings call. Despite its current heat of expansion, “it doesn’t make sense to raise money because we expect to generate cash despite this growth level,” he said.

Then came today’s news that Tesla would sell another $2 billion in stock—with the common option for the underwriters to purchase another 15%, or $300 million. The cash raised will be used to “strengthen its balance sheet, as well as for general corporate purposes,” a company press release stated.

Shares jumped 4.8% over yesterday, reaching $804—the second highest value the stock has ever seen, the record being $887.06 earlier this month. At that price, even $2.3 billion (including the underwriters’ option) in value would be about 2.9 million shares, or a 1.6% addition to the outstanding 181 million shares, minimizing dilution for other shareholders.

Musk said he planned to buy up to $10 million in shares during this offering. Board member, strong Tesla supporter, and Oracle co-founder and executive chair Larry Ellison said he would purchase $1 million. (The Wall Street Journal reported today that the Security and Exchange Commission is taking another look at Tesla’s financing and accounting practices, though reportedly the interest predates the round’s announcement. Tesla did not respond to Fortune’s request for comment.)

A surprise? Not really. Musk u-turns are hardly new.

“[W]e’d like to see more consistency between the company’s actions and the words of CEO Elon Musk,” David Whiston, an industrials strategist for Morningstar, wrote in a note to clients today. “This is at least the second time Musk has said on an earnings call that raising capital is not happening and then shortly thereafter Tesla raises capital.”

The reversal may be Musk’s contrarian nature, according to Mauro Guillen, a professor of international management at the Wharton School of the University of Pennsylvania. “Musk loves to confuse journalists,” he said. Or it may be a strategic concern of being a chief executive. “The average CEO most of the time doesn’t want the market to anticipate their next move.”

Whatever the reason, the move is a smart one, according to experts.

Even with some heavy volatility, Tesla’s fast driving shares have left the company with the world’s second largest market capitalization of any auto manufacturer, behind Toyota. It’s quite the change from less than a year ago when a plunge in share price saw many investors and analysts jump ship. The current strength of the stock makes raising capital through issuing more stock cheaper than additional debt.

As of Dec. 31, 2019, Tesla had total unpaid debt of $12.5 billion, according to the company’s most recent 10-K filing. Of that, almost $1.4 billion, in the form of 1.25% notes, comes due in 2021. Another $978 million at 2.375% is due in 2022. Then, in 2024, another $1.84 billion at 2%, followed by $1.8 billion at 5.3% in 2025.

Interest payments run hundreds of millions of dollars a year and a number of the notes are convertible, which means the holders might require “cash and/or shares,” according to the 10-K.

Tesla “could probably refinance if they wanted to and on better terms,” said Joseph Osha, senior analyst and managing director in equity research at JMP Securities. (The firm currently has an interest in Tesla shares and looks to perform investment banking services for the company in the near future, according to the firm’s disclosure statement.)

But why refinance when issuing new equity is a possibility?

“It’s not surprising when a company does a re-offering when the stock price is high,” said Reena Aggarwal, a professor of finance and director of the Center for Financial Markets and Policy at Georgetown University. “They raise debts when interest rates are low. When market conditions are right, it makes sense for companies to raise capital.”

Although some of the money raised will go to strengthening the balance sheet—otherwise known as paying off debt—other amounts will likely fund further growth.

“The reason you go out and raise money now is you can potentially accelerate this rate of capital investment,” Osha said. “It’s not to pay down debt [only] and not because they’re running out of money. It’s to accelerate the rate at which they are adding capacity.”

Capacity at this point is critical. For years, Tesla has had to maximize revenue and profits from production that couldn’t keep up with consumer demand. And so, the company had to pick and choose where to sell.

For example, Tesla has strongly favored Norway as a European sales destination because of the tax incentives provided to people there. “It turns out it’s much cheaper to buy an electric car than internal combustion,” said Matthias Schmidt, a German automotive analyst. “Normally it’s around 40% of the market [in that country].” Tesla also focused heavily on the Netherlands in the fourth quarter of 2019 because of an impending tax change that drove demand. Now, with a new tax break, the U.K. will be the likely target for sales—because of an improvement in tax treatment.

But, ultimately, Tesla needs to satisfy markets with factories on each continent in which it does business. The U.S. factory can’t produce as many units as the company could sell.

“This is a cult guy and a cult product and a bull market, and he should sell shares,” said Jason Ader, founder and CEO of SpringOwl Asset Management and an owner of Tesla shares. “But the bulls better not kid themselves. If we were ever in a market like 2008 and 2009, there are a lot of stocks that would be repriced [downward]. Tesla is close to the top.”

For the time being, Tesla is going to grab the money while it can.

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