Morgan Stanley Underwrites TSLA Convertible Offering Day After 100% Stock Price Upgrade
Tesla has just announced it intends to issue a $1.6 billion convertible note offering "for the development of a "Gigafactory" and a "Gen III" vehicle." While not that unusual - and of course, why not take advantage of low cost financing and a surging momentum in your stock - what we did find at least intriguing was the underwriters included Morgan Stanley. This is the same firm (though we would be very sure that Chinese walls ensured total lack of knowledge) that doubled their price target (from $153 to $320) for TSLA yesterday (following the analyst's now almost clairvoyant questions during the earnings conference call). Paging Henry Blodgett?
Four things jump out at us...
1. During the recent conference call, MS analyst Adam Jonas seems to be advancing the idea of a capital raising for this battery factory on the behalf of Musk, who just agrees with the concept...
Adam Jonas: Elon, the stock price and the results have been obviously performing very well lately. You’ve got some great investment opportunities and some growth opportunities ahead of you, not only in the auto business but also in the non-auto business and the battery business. So I’m just wondering, how are you thinking about being opportunistic and pulling in some fresh capital to help derisk the plan, plan for a force majeure, or to see some of these opportunities that you have.
Elon Musk: Yes, I think that’s a good idea. I agree with that. I think that would be the smart move. We can talk more about that next week with — and also discuss the Gigafactory plans. Unfortunately, I can’t say anything [indiscernible] right now, except that I agree. I think your advice is good.
Adam Jonas: Okay. And I don’t want to follow up [ph] or anything, but as a follow-up to that, I guess, is a — would a capital raising be a prerequisite to launch the Gigafactory? Or is that an understatement?
Elon Musk: I think it’s necessary to have it occur in 3 years. It’s not necessary if we allow that time frame to expand.
2. Morgan Stanley raises their price target for TSLA by over 100%
January 25: Raising our price target to $320 from $153 previously.
We understand the change to our fair valuation of TSLA shares is significant – more than $13bn on a fully diluted share count of 142m.
This magnitude of value attribution is equivalent to an additional $1.7bn of after tax free cash flow by 2020, growing at 5% with a 12% discount rate. A $1.7bn NOPAT number is enormous within the scope of Tesla’s existing business path (our current forecasts call for $0.8bn of net income by 2015 and $2.1bn by 2020).
However, from the perspective of a global auto industry (>100 million annual unit sales and >$2 trillion of revenues by 2020) or a global electric utility industry (0.7 billion households combined in US + Europe + China out of households 1.4 billion globally) it is a tiny number. Our previous forecast of 500k complete TSLA vehicles by 2028 would account for 40bps of global market share.
Successful? Yes. Disruptive? Not really at all.
3. Day after Stock soars $60, Morgan Stanley underwrites a huge convertible note issue for TSLA (implicitly reducing an dilution via the stock ramp).
Tesla announced today an offering of $1.6 billion aggregate principal amount of convertible senior notes in an underwritten registered public offering. Of the total offering, Tesla will offer $800 million aggregate principal amount of convertible senior notes due 2019 and $800 million aggregate principal amount of convertible senior notes due 2021. In addition, Tesla intends to grant the underwriters a 30-day option to purchase up to an additional $120 million in aggregate principal amount of convertible senior notes due 2019 and an additional $120 million in aggregate principal amount of convertible senior notes due 2021, for a total potential offering size of up to $1.84 billion.
Goldman, Sachs & Co., Morgan Stanley, J.P. Morgan and Deutsche Bank Securities are acting as joint book-running managers for the offering.
and 4. In the disclosures, of course, Morgan Stanley admitted it would seek compensation from Tesla (which it did)...
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Autoliv, Avis Budget Group Inc, BorgWarner Inc., Dana Holding Corp., Delphi Automotive PLC, Ford Motor Company, General Motors Company, Goodyear Tire & Rubber Company, Hertz Global Holdings Inc, Johnson Controls, Inc., Lear Corporation, Magna International Inc., Tenneco Inc., Tesla Motors Inc., TRW Automotive Holdings Corp.
As long as CNBC (and everyone else in the status quo hugging mainstream media) keeps pumping every word from the sell-side as gospel, this will never end...
While we are sure this is a mere coincidence and that sell-side research which absolutely cannot pay its own way has learned its lessons, as one smart chap wrote us...
This is exactly the modus operandi of the dot-com analysts: roping retail investors in at higher and higher levels while the companies concerned massively diluted shareholders leading to an implosion... I cant remember a time apart from Dotcom where price targets were jacked up in this way right before a capital raising.