Tesla Motors Inc. (TSLA)’s Elon Musk is poised to follow in the footsteps of Lee Iacocca, who 30 years ago as Chrysler Corp.’s chief executive officer retired a controversial U.S. obligation years early.
Musk, Tesla’s CEO and co-founder, expanded the size of equity and debt offerings by 30 percent to as much as $1.08 billion to boost the company’s cash reserves and repay a $465 million Energy Department loan nine years ahead of schedule. Iacocca in 1983 paid Chrysler’s U.S. loan guarantees seven years early.
“It’s a relevant comparison, but for two very different kinds of companies,” said Ed Kim, an industry analyst for AutoPacific Inc. in Tustin, California. “If you look at Tesla’s performance to date they’re a startup that’s basically hitting every milestone they set. In the case of Chrysler, you had an older industrial company teetering on the brink of death.”
Tesla’s early repayment sets it apart from Fisker Automotive Inc., which failed in a similar bid to profit from rechargeable autos, as well as large carmakers that aren’t under pressure to reimburse the Energy Department. The standard repayment schedule for Ford Motor Co. (F)’s $5.9 billion loan and Nissan Motor Co. (7201)’s $1.4 billion loan is 10 years. Fisker missed a loan payment, and is at risk of bankruptcy after halting output last year and firing most of its staff last month.
Shares of the company named for inventor Nikola Tesla fell 0.8 percent to $91.50 yesterday in New York. They (TSLA) have soared 170 percent this year, compared with a 17 percent increase for the Russell 1000 Index. Tesla investors include Toyota Motor Corp. (7203) and Daimler AG. (DAI)
Loans for Tesla, Ford, Nissan and Fisker were all awarded from a program created under President George W. Bush in 2007 and implemented by President Barack Obama in 2009.
Tesla plans to use $452.4 million to pay off its Advanced Technology Vehicles Manufacturing loan, with interest, the company said in a statement. Tesla plans to pay back its loan in full next week, said two people familiar with the matter. Based on the $25.4 million already paid to the Energy Department, taxpayers may see as much as a $12.8 million profit, based on company filings. Tesla and the Energy Department each declined to comment on the timing.
Chrysler in 1983 repaid $1.2 billion in loans guaranteed by the U.S. in a bailout that netted about a $300 million profit. Iacocca, 88, paid the last $813.5 million in a New York ceremony in August 1983.
Tesla, based in Palo Alto, California, said in a filing yesterday it intends to sell as many as 3.9 million shares for $92.24 apiece. Musk, 41, is to purchase 1.08 million shares for about $100 million and convertible notes may raise as much as $648 million.
“Just two weeks ago, the thought of Tesla raising $1.1 billion of capital may have required a stock price in the $20s with significant dilution,” Adam Jonas, a Morgan Stanley (MS:US) analyst who rates Tesla overweight, wrote in a May 17 report. He also raised his target price for the shares to $109 from $103, “making Tesla our new top pick in U.S. autos.”
Tesla said that cash and cash equivalents at the end of March, adjusted for the fundraising, U.S. repayment and $50.9 million in hedging-related costs, would more than triple to $678.8 million, from $214.4 million.
South African-born Musk, who is also CEO of rocket maker Space Exploration Technologies Corp. ((711339Z) and chairman of solar power company SolarCity Corp. (SCTY), was 12 when Iacocca made Chrysler’s final U.S. payment.
“Chrysler was a crisis situation,” said John Casesa, senior managing director of investment banking at Guggenheim Partners LLC. “Tesla was really a venture capital investment, and the odds of a venture capital investment paying off are almost always worse.”
“That the investment in Tesla has succeeded is probably more remarkable,” Casesa said. “This company has done what’s virtually impossible: create a new car company.”
Tesla on May 8 reported its first quarterly profit, and said it plans to deliver 21,000 cars this year. The next day a Consumer Reports magazine review of the company’s Model S scored the electric car, with a $69,900 base price, as among the best it’s ever tested.
The green-car loans, along with Energy Department funds for failed lithium-ion battery manufacturer A123 Systems Inc. (AONEQ:US) and solar-panel maker Solyndra LLC, have been a target of criticism from Republicans, including Senators Charles Grassley of Iowa and John Thune of South Dakota. Darrell Issa of California, chairman of the House Oversight and Government Reform Committee, held hearings on Fisker’s loans last month.
“In general, the Energy Department should develop informed and realistic expectations about loan recipients’ ability to repay their loans,” Grassley said in an e-mailed statement on May 16. “That didn’t happen with Fisker, so it would be noteworthy and even surprising if another high-profile loan recipient is able to repay its loans.”
Tesla and Fisker were lumped together as “losers” by Mitt Romney, the 2012 GOP nominee, as he campaigned for president last year. Sarah Palin, the Republican 2008 vice presidential candidate, attacked Tesla last month in a Facebook comment as “Obama-subsidized” and the loan program as an “atrocious waste of taxpayer money.”
Musk said in an interview this month there was a need for U.S. support following the 2008 recession.
“Particularly given the timing of where the economy was, there was some merit to the government involvement,” Musk said on May 2 in Hawthorne, California.
The carmaker arranged in March to repay its U.S. loan in five years, rather than the original 10-year period.
Tesla completed drawing down the funds Aug. 31, 2012. The company made a first loan payment of $12.7 million in December 2012, and a further $12.7 million payment in 2013’s first quarter. Under the original terms, the repayment schedule ended in December 2022.
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