
Tesla Announces $1.6 Billion Convertible Notes Offering - revelation
http://www.teslamotors.com/about/press/releases/tesla-announces-16-billion-convertible-notes-offering
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digikata
Is there a reason for Tesla to raise funds via Convertible Notes vs issuing
additional stock? I know little about this area.

edit: Thanks for a range of informative replies!

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dpcheng2003
Cheap debt with enough financial engineering to minimize EPS dilution.

TSLA is an ideal stock for convert debt because it's highly volatile (compared
to some other companies) which makes the pricing more attractive and opens it
up for a certain class of buyers.

Source - I used to price these for a living.

~~~
billyarzt
These also allow for deductions at Tesla's applicable plain vanilla debt rate,
which would be much higher than the cash interest rate on the notes (by using
a call spread on top of the embedded option). So there's a tax arbitrage as
well.

Source: I used to structure and sell these for a living

"In connection with the offering of the notes, Tesla intends to enter into
convertible note hedge transactions and warrant transactions, which are
generally expected to prevent dilution up to approximately 100% over the
common stock price at the time of pricing of the notes due 2019 and 120% over
the common stock price at the time of pricing of the notes due 2021. Tesla
intends to use a portion of the proceeds from the offering to pay the net cost
of the convertible note hedge transactions. In connection with establishing
their initial hedge of the convertible note hedge and warrant transactions,
the hedge counterparties or their affiliates expect to enter into various
derivative transactions with respect to our common stock concurrently with or
shortly after the pricing of the notes, including with certain investors in
the notes."

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dpcheng2003
Billy... it's David Cheng (Hans' buddy). BofA tech ECM desk, FTW.

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billyarzt
Ha, amazing. FTW for sure! Hope you're well.

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samelawrence
I always wish stuff like this happened to me on the internet.

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dpcheng2003
Lawrence! You're exactly the same as I remember.

Get it?

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samelawrence
Oh, I get it. I get it a lot.

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cs702
Wow, they expect to be selling _half a million_ vehicles/year in six years.
That would make make a Tesla a _major_ automaker, roughly in the same league
as household-name auto brands -- you know, the ones that advertise in the
Super Bowl.

~~~
mikeyouse

        Wow, they expect to be selling half a million 
        vehicles/year in six years.    
    

No no no, they expect to sell batteries to power half a million vehicles per
year.. They intend to supply other auto companies with battery packs.

    
    
        That would make make a Tesla a major automaker,
        roughly in the same league as household-name auto brands.
    

It would still be a magnitude smaller than all 'major' manufacturers. Toyota
sells ~10M/year, GM ~9.5M/year, VW ~9.2M/year, Ford ~5.5M/year, Chrysler
~2.4M/year, BMW ~2M/year..

There's no shame in being a wildly profitable smaller manufacturer though.

~~~
cs702
Ah, that would make more sense.

That said, half a million vehicles would make them 1/4th the size of BMW and
1/5th the size of Chrysler. For me, that's "roughly in the same league as
household-name auto brands."

(For reference, right now, they are around 1/100th the size of BMW and
Chrysler.)

~~~
Crito
500k/year would put them in the same ballpark as the American subsidiarity of
Hyundai (Hyundai Motor America) which made 720,783 cars in 2013
([http://www.hyundainews.com/us/en-
us/Corporate/SalesReleases/...](http://www.hyundainews.com/us/en-
us/Corporate/SalesReleases/PressReleases.aspx)).

Obviously less than Hyundai internationally, but that might be an easier
example to wrap your mind around.

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cloudwizard
This means that the law banning Tesla sales in Texas will be off the books in
about 20 seconds.

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tdiggity
If Texas is the right place for it, then so be it. But, it would be a great
way to stick it to them by not choosing them because of their stance on
traditional dealers vs. Tesla.

~~~
riggins
it would be sweet if Telsa uses this as leverage to roll back the dealership
law.

~~~
cfreeman
That would be sweet but I can't see that dealership law standing indefinitely
either way. I don't think Texas should get the plant unless they are truly the
best place for it.

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crabasa
TSLA up 2% on the news:

[https://www.google.com/finance?cid=12607212](https://www.google.com/finance?cid=12607212)

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paulftw
Usually, when you start investing in manufacturing, that means R&D has
achieved all it could.

So is this factory a sign that Tesla is settling down on the current levels of
cell capacity, charging times, weight, etc?

I.e. they don't believe in a breakthrough before 2020, do they?

~~~
wtvanhest
I've never heard that view before. Do you know of some examples that fit that
model?

The one I can think of that doesn't fit is Intel. They continue to innovate
while investing in manufacturing.

~~~
paulftw
It's not the fact they invest in manufacturing, it's the size of the
investment compared to company size/assets.

Factory is supposed to pay for itself _before_ its product becomes deprecated.
Looking at how expensive this gigafactory is - how many years will it take
before profits from selling li-ion batteries cover the equipment &
construction costs?

Some projections say peak output is expected by 2019-2021. Doesn't this imply
that today's technology will still be competitive and in demand 6-7 years from
now?

I'm assuming gigafactory uses chemicals and tech that powers current
generation of Tesla cars. Because if they had something significantly better
they would not care about 2019, but would instead die to get it to market
ASAP. Not caring about unit price or volumes. Just to prove that it works and
to capture the high end market.

And my second assumption is they don't plan to lose money on this project.

~~~
wtvanhest
> Some projections say peak output is expected by 2019-2021. Doesn't this
> imply that today's technology will still be competitive and in demand 6-7
> years from now?

Tesla never said they will be building today's batteries in the plant and I
would be surprised if your assumption is correct. They likely have projections
on their R&D and can also project how long it takes to build massive capacity
on what they are building.

All major manufacturers of all complex products are faced with the same
challenges. Management must match R&D to production or they will have huge
misses. Manufacturing true technologically advance products is tough.

There are many examples of companies that simultaneously invest in R&D while
making far out production capacity investments: Intel, all Pharmaceutical
companies etc. etc.

If you can think of some companies that invest heavily in R&D, then stop
investing in R&D and start investing in manufacturing, I would be interested
in learning about them and why.

~~~
paulftw
I don't know how Intel operates. Did they start building a 90nm factory before
they finalised the process of making a 90nm chip? Can they upgrade a 90nm
plant to start producing 45nm, and will it cost less than half of the original
spend?

As for pharmaceuticals - I'd expect their plants to a) be capable of producing
multiple different compounds and b) equipment to be modular. Research &
clinical trials are expensive, reconfiguring equipment to make newly
discovered drug is cheap. Once proven to work, drug can be replicated fairly
quickly and cheaply, that's why they push so hard against any patent law
reform.

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chiph
A half-million batteries a year means they need raw materials to support that
production. Are there suppliers that can do that? After all, these are car-
sized batteries, not phone-sized ones.

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dbg31415
Fuck, I read all that and still no news of a Tesla Convertible. Bring back the
Roaster! Any executive that opts to discontinue a 2-seater needs to be shot.

~~~
josh-wrale
I wouldn't be surprised if the reason for a current lack of a convertible is a
strategic move away from the following things:

1) making the cars even more expensive (by making) 2) things that have to high
potential for fatality 3) things that require lots of engineering, testing and
certification for a limited appeal/run (and thus limited profit)

It will be awhile on that convertible, I bet.

The Model X has gullwing(-like) doors.. That's pretty cool, right?

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grecy
> _The Model X has gullwing(-like) doors.. That 's pretty cool, right?_

[http://i52.photobucket.com/albums/g24/speed_addict/Lambo-
Doo...](http://i52.photobucket.com/albums/g24/speed_addict/Lambo-Doors-So-
Played-Out.jpg)

~~~
josh-wrale
That is a truly awesome image. Here's the Model X:
[http://image.automobilemag.com/f/57687390+q100+re0/Tesla-
Mod...](http://image.automobilemag.com/f/57687390+q100+re0/Tesla-Model-X-
falcon-doors.jpg)

~~~
Crito
Does anybody know if those doors have cup-holders? Parents of small children
might get a little surprise when they open up those doors if they do.

In any event, they seem more practical than regular doors and are certainly
cooler than sliding doors.

~~~
deletes
That must have been a design tradeoff.

These are some pictures of the Model X, I have found. There are no "holes",
only arm-rests. The black detail on the second picture must be the window
control.

[http://d.ibtimes.co.uk/en/full/230436/model-x.jpg](http://d.ibtimes.co.uk/en/full/230436/model-x.jpg)

[http://b.fastcompany.net/multisite_files/codesign/poster/201...](http://b.fastcompany.net/multisite_files/codesign/poster/2013/01/1671665-poster-
tesla-model-x.jpg)

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jake_nd
Vertically integrating seems logical. Next step, lithium mines?

And will they build the same 18650 packs, or develop something new?

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jacquesc
Just curious, how does this differ with 'junk bonds'?

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riggins
'junk bonds' are bonds with a high interest rate because of poor credit
quality.

convertible bonds basically have an equity option attached, so the interest
rate paid by the issue is lower than what it would be otherwise (because the
buyer is getting an option).

Often it is low grade companies that issue convertible bonds (to keep the
interest expense they pay down), but it doesn't have to be. Investment grade
companies can issue converts as well.

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kirk21
Buying more panasonic stock as we speak. They are one of their main partners
and the stock is still damn cheap.

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hrvbr
Oh, the Tesla website is available in French now and they're building stores
all over Europe.

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aroch
So, bet's that the recent Apple/Tesla meetings were about Apple joining this?

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zinssmeister
those meetings with Apple weren't really "recent". But yeah Apple has a high
interest in batteries as well of course.

