I put out the math in a comment in another thread but I thought it would be worthwhile to discuss in it's own post. As we all know Tesla announced on 3/15 that they were doing another $1B capital raise. Many of you were wondering why the market jumped suddenly. Shouldn't the stock price always go down when there is dilution? Is the market irrational?? Well, no, if you do the right sort of fundraising!
Tesla announced that they sold $250M in common shares and $750m in preferred shares that covert into common stock at a specific strike price. These preferred shares are also known as warrants or call options. They expire in 2022. How call options/warrants work is they give the holder the right, but not the obligation, to buy Tesla stock at a future price, typically at a higher price than it is today. If the strike price is $300/share then it will give the buyer the right to buy Tesla at $300 a share. if Tesla goes past $300/share by the date then the option holder is profitable. Otherwise, Tesla is profitable as they've essentially sold worthless paper. Issuing warrants is a great way for a strong company to pull in a lot of cash now at the expense of their future stock price.
They haven't announced the details on how they would work so here is how the math breaks out for the best case and worst case and gives Tesla a new price range:
Announcement date: 3/15. Share closing price: $256.37.
Shares outstanding: 161.67M.
Old market cap: $41,447M.
Common Math
$250M common raised. Assuming sold at $256.37/share. $250M/$256.37 = 975,153 additional shares. Worst possible dilution at market price assuming the market values Tesla at the same:
($41447M+$250M) / 162.645m shares = $256.36/share.
(worst dilution if Tesla sold at less than market on the capital raise but we won't go into it here as we don't know what they sold at or how many shares authorized.)
Worst case if sold lower than market dilution. Last year it was $240 a share and I could see that being the same this year:
$250M/$240 = 1,041,666 shares outstanding.
New dilution price: ($250m+ $41,447M)/(162.80M) = $256.12/share.
Warrant math
Now, we still have $750M in warrants. Assuming the best possible case they expire worthless in 2022 and that Tesla didn't do anything really crazy like grant a billion warrants at $300/strike (Tesla got free cash and it doesn't matter the terms at all of the options as they will always be worthless) then we have this best case dilution figure:
($41,447M+$250M+$750M) / 162.645m shares = $260.97/share.
$240/share deal with expiring warrants:
($41,447M+$250M+$750M) / 162.80m shares = $260.73/share.
Worst case warrants are 100% in the money, 1.0 delta, equivalent to stock: $750M/ $256.37 = 2,925,459.3 shares authorized. Total outstanding shares of commons (say market price issue so 975k shares issued) and deep in the money warrants:
161.67M + 2.95M + .98M = 165.6M ($41,447M+$250M+$750M) / 165.6M shares = $256.3/share.
Worst case if warrants were $240/share and equivalent to stock:
$750M/ $240= 3,125,000 warrants
161.67M + 3.13M + .98M = 165.78M ($41,447M+$250M+$750M) / 165.78M shares = $256.04/share.
TL;DR
The warrants are basically free cash for Tesla best case if they all expire or are way far out of the money.
Tesla's range should be [$256.04 - $260.97]/share assuming the market outlook post raise is identical.
Disclaimer:
Now, I didn't get into complex cases if they sold at the money warrants as it would require trying to estimate a fair price using black scholes or any shareholder lawsuit worthy cases like if they issued 1 billion warrants at $240 strike. The range should be pretty accurate assuming they did everything legal but we just don't know for sure until TSLA announces more details.
Submitted March 16, 2017 at 07:23PM by IncendiaryGames http://ift.tt/2nfd2xr
