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Breaking: Tesla Cashing In On Valuation — How Paying Off Debt Could Cut P/E In Half

Tesla has entered an agreement with a series of banks to sell shares over time to raise up to $5 billion. This will result in only 1% dilution to existing shareholders if they are sold at today’s prices. What does this imply?

Disclaimers: I’m a Tesla shareholder and this isn’t financial advice.

Just a day after Tesla’s 5 to 1 stock split, as Tesla continues to advance its mission to accelerate the world’s transition to sustainable energy, most recently demonstrated by the news that Tesla is very successful at getting people to give up their gas cars, CNBC has reported that Tesla has entered an agreement with a series of banks to sell shares over time to raise up to $5 billion. This will result in only 1% dilution to existing shareholders if they are sold at today’s prices. If you want to see Tesla’s announcement, go to its SEC filings page here.

I’ve copied a section of the filing below:

We have entered into an equity distribution agreement, or 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 our sales agents, under which we may offer and sell from time to time our common stock having an aggregate offering price of up to $5,000,000,000. The sales agents may act as agents on our behalf or purchase shares of our common stock as principal.

Our common stock is traded on the Nasdaq Global Select Market under the symbol “TSLA.” The last reported sale price of our common stock on August 31, 2020, as reported on the Nasdaq Global Select Market, was $498.32 per share.

Sales, if any, of common stock under the equity distribution agreement may be made in ordinary brokers’ transactions, to or through a market maker, on or through the Nasdaq Global Select Market or any other market venue where the securities may be traded, in the over-the-counter market, in privately negotiated transactions, in block trades, in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act or through a combination of any such methods of sale. The sales agents may also sell our common stock by any other method permitted by law.

We will designate the maximum amount of common stock to be sold through the sales agents on a daily basis or otherwise as we and the sales agents agree and the minimum price per share at which such common stock may be sold. Subject to the terms and conditions of the equity distribution agreement, the sales agents will use their reasonable efforts consistent with their normal sales and trading practices to sell on our behalf all of the designated shares of common stock. We may instruct the sales agents not to sell any common stock if the sales cannot be effected at or above the price designated by us in any such instruction. We or any sales agent, with respect to itself only, may suspend the offering of our common stock by notifying the other party.

It doesn’t specify a start or end date, so we will have to watch future filings to get an indication of how quickly these shares will be sold. This move could be a way to make it easier for S&P 500 funds to buy into the stock if it is included in that index soon, as has been widely speculated in this Tesla Daily video and others. Since the agreement specifies Tesla sets both the maximum number of shares and the minimum price per share each day, it allows Tesla to ensure the shares aren’t sold at a time when the market is moving against the company. In addition, it states the agent gets a 0.5% commission and certain expenses reimbursed. Tesla stated that it intends to use the proceeds to strengthen its balance sheet as well as for general corporate purposes. This is just a vague statement that says the company doesn’t intend to tell us now what it plans to do with the money.

In another 8K, also filed today, Tesla announced it ended a “Vehicle Lease Warehouse Credit Facility” established in 2017 and 2018 with Deutsche Bank AG.  I would speculate that the terms Tesla could get now are far better than what it could get earlier, so it makes sense that Tesla would end this agreement, which probably has fees required as long as it is open.

Why This Could Be A Smart Move

Looking at Tesla’s recent quarterly report, it had $10.6 billion in debt and interest expenses of $170 million for the quarter, implying an interest rate on that debt of 6.5%. If Tesla raises the full $5 billion and pays off half its debt, that would cut interest expenses in half (or by $85 million). Considering that profits over the last 4 quarters have averaged $92 million, this would result in almost a doubling of profit for only a 1% dilution, a wise move in my opinion during these uncertain times. Doubling earnings with minimal effect on the share count would cut Tesla’s price/earnings (P/E) ratio in half, making its valuation more reasonable to existing and potential investors alike.

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Written By

I have been a software engineer for over 30 years, first developing EDI software, then developing data warehouse systems. Along the way, I've also had the chance to help start a software consulting firm and do portfolio management. In 2010, I took an interest in electric cars because gas was getting expensive. In 2015, I started reading CleanTechnica and took an interest in solar, mainly because it was a threat to my oil and gas investments. Follow me on Twitter @atj721 Tesla investor. Tesla referral code:


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