Does Tesla's Stock Offering Hint at S&P 500 Inclusion?
Tesla started September off by announcing an equity distribution agreement which could allow them to raise up to $5B in capital by issuing new TSLA shares and selling them on the open market.
Unlike a standard follow-on offering in which a company works with banks to set a fixed price on newly issued shares, Tesla has chosen what is sometimes called an "at-the-market" offering. This more flexible structure allows Tesla to set minimum acceptable sale prices on newly issued shares and allows them to change those minimums daily or even more frequently.
"We will designate the maximum amount of common stock to be sold through the sales agents on a daily basis or otherwise as we and the sales agents agree and the minimum price per share at which such common stock may be sold," Tesla stated in the filing.
If Tesla is not interested in issuing new shares at the price the market is offering, they can choose to sell fewer shares and raise less capital, or perhaps none at all. If the share price rises, Tesla can take advantage of the higher prices to raise capital with minimal dilution to shareholders.
The downside of this structure is that if Tesla does need the additional capital, they expose themselves to the risk of the share price falling. That risk is mitigated if the capital is not required.
The timing of the agreement is interesting as investors wait to see if Tesla will be added to the S&P 500 index. With more than $4.6T in assets under management tracking the index, an inclusion would mean tracking funds would need to buy roughly 130M shares of TSLA stock over a relatively short time period. With only about 740M "float" shares available to trade, this could prove challenging and may put upward pressure on the stock as funds scramble to build equal-weight positions.
Tesla could ease some of that pressure by issuing new shares, an option that is now at the ready with the equity distribution agreement in place. It's possible that S&P Global expressed concerns about share availability to Tesla in regards to a potential inclusion and this is Tesla's response to reduce those concerns to some extent.
If the action is unrelated to the S&P 500, perhaps Tesla wants to prepare for a raise in the wake of their upcoming Battery Day on September 22.
What do you think? Let us know in the comments section. For more analysis on Tesla including news on the made-in-China Model Y, please see the included video and follow Tesla Daily on TheStreet.
Disclosure: Rob Maurer is long TSLA stock and derivatives.