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Tesla could run out of cash before the end of the year - here's how Elon Musk could change that
Tesla could run out of cash before the end of the year - here's how Elon Musk could change that
Matthew DeBordApr 7, 2018, 18:32 IST
Joe Skipper/Reuters
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Tesla could run out of money before the end of 2018, as it ramps up production of its Model 3.
In a recent filing with the Securities and Exchange Commission, Tesla said it wouldn't need to raise additional funds, but it has said that before and gone on to raise billions.
CEO Elon Musk, however, has some fundraising options.
Tesla has officially declared that it won't need to raise any additional funds in 2018, but market observers and close followers of the company aren't buying it.
After all, back in 2016 CEO Elon Musk said Tesla wouldn't need to raise capital to get the Model 3 sedan rolling off the factory floor, and then in 2017 Tesla not only raised money twice, to the tune of about $3 billion in mixed equity-debt offerings, it also saw 5% of its stock bought up by China's Tencent.
Tesla burned through over $2 billion last year and is on track to spend that much or more in 2018, with just about $3 billion in cash currently on the balance sheet.
The carmaker is counting on cash flow from the ramped-up Model 3 to cover the gap, along with ongoing revenue from the Model S sedan and Model X SUV. But that's a major league bet, and with the Model 3 production lagging targets, Tesla is right on the edge. The company nearly went bankrupt once before, in 2008, and there's a distinct possibility that it could face insolvency again.
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But Musk has options, and they don't entail raising new capital through issuing equity, which would again dilute existing shareholders, or debt, which could set off alarms in the high-yield bond markets if Tesla can't command the same low rates it did when it sold junk debt in 2017.
Let's run through the ways that Tesla can keep the lights on.
Musk sells chunks of the company to big new investors.
After the near-death bankruptcy experience, Tesla sold a stake in the company to Daimler, and later saw Toyota buy up shares following a 2010 IPO.
Both companies have since divested, but they made some serious profits on their early votes of confidence as Tesla's value skyrocketed; at one point, investors were looking at a better-than-1,000% return.
A 5% stake taken by Tencent last year could be expanded, and it's not out of the question that another Chinese company, particularly a carmaker, might see Tesla as a savvy investment. I don't think anyone could acquire Tesla outright — the $40-billion-plus market cap makes the bite too big. But a 10%-25% stake wouldn't be out of the question.
Tesla expands its credit lines.
This move seems extremely likely at this point.
Tesla has access to about $2 billion via its credit lines, but tapping them fully wouldn't provide enough funds to maintain the $1-billion cushion the company likes to have on the balance sheet.
Tesla hasn't experienced too much difficulty expanding its lines in the past, and if the company is right about rising revenue from more Model 3 sales, then it ought to be able to service those lines of credit.
However, this move would undermine profitability, although in fairness many investors don't expect Tesla to post steady profits for several years.
Tesla sells SolarCity.
What's SolarCity worth?
Tesla merged with the struggling solar-panel company in late 2016, in a deal valued at about $2 billion, but with a big debt load attached.
That debt would discount the value of a future sell-off, which would probably look like a fire sale and a sign that Tesla is desperate. But on the plus side, such a move would improve Tesla's balance sheet greatly and relieve the company of future debt payments.
Tesla could also spin SolarCity off and put into bankruptcy, but it might be difficult to make that work because Tesla would then most likely end up financing the restructuring. If Tesla shuttered SolarCity, it would have to account for the loss, and that would be a major financial hit.
As for what SolarCity is worth, analysts have suggested that it's currently zero, as it's making a negligible contribution to Tesla's bottom line, although the business appears to be growing.
Tesla partners with a major carmaker.
This strikes me as the most unlikely strategy, but hey, you never know! I wouldn't expect General Motors or Ford to join with Tesla, but somebody like Fiat Chrysler Automobiles might.
FCA, under its outgoing CEO Sergio Marchionne, has been trying to merge with another automaker for several years. Marchionne hasn't been able to pull off a tie-up — he was rebuffed by GM — but the company, while posting strong US sales of SUVs and pickups, is lagging the competition when it comes to electric vehicles and self-driving technology.
With Tesla, it has also seen its stock perform well for the past 12 months — up 125%. Tesla has swooned of late, but prior to that, it was threatening $400 per share in 2017.
I don't think it would be possible for either automaker to acquire the other without substantial leverage, but a partnership or alliance, with each company acquiring some of the other's shares, might make sense. Technically, my sense is that smaller-by-market-cap FCA ($30 billion) would effectively take over Tesla and add it as a division.
FCA might pause at contributing its cash — around $18 billion — to Tesla's seemingly insatiable needs, especially because Marchionne is also determined to eliminate FCA debt before he rides off into the sunset in 2019.
Tesla takes loans against its assets.
Ford did this when it avoided bailouts and bankruptcy before the financial crisis. Then-CEO Alan Mulally mortgaged the Blue Oval and stockpiled $24 billion, which was enough to ride out the Great Recession.
Tesla could throw a similar Hail Mary pass, assuming that borrowing against everything would pay off as Model 3 production rapidly increases and sales bring in lots and lots of fresh cash.
On the flipside, if the plan doesn't come together, Tesla would be in big trouble.
Get some big money from a Silicon Valley savior.
Musk has no shortage of friends and allies in Silicon Valley who are drowning in cash and don't want Tesla to fail. Let's say Tesla needs $3 billion to make it through 2018.
Google co-founder Larry Page is personally worth almost $50 billion. A few billion for the guy who has let Musk crash at his house would be chump change.
He's also already said Musk should get his money, to pursue massive dreams like going to Mars. And Page and Google were once rumored to be prepared to buy Tesla, back when the carmaker was struggling in 2013.
