Tesla IPO: Will build electric cars for $178 million

Tesla is losing money, but its IPO is likely to succeed because it's the sexiest automaker on the planet, and everybody wants some of the fairy dust.

Fri, Jun 25 2010 at 4:02 PM EST

CASH POOR: Elon Musk, and his company, are in money-raising mode. (Credit: Flickr/Jdlasica)

Tesla Motors, whose $109,000 electric Roadster is vividly familiar to anyone who’s ever picked up a car magazine (or, recently, a business one) is trying to go public and raise $178 million (up from $100 million). My guess: They’ll do it, because Tesla is a very sexy business, with a great image. Who wouldn’t want to tell people at cocktail parties that they’re an investor in Tesla?

The harder part will be getting the company out of the high-end luxury niche it is in now. Tesla’s strategy is clear enough: It’s rolling out the Model S at $49,900 (inclusive of a $7,500 federal tax credit) late next year as a 2012 model, and with the money that better-selling sedan brings in will then prepare an even-more-affordable third car. At that point, a publicly traded Tesla Motors will go mainstream and get out of the niche.

It’s easier said than done, of course. Phil Gott, an analyst at IHS Automotive Group, points out that Tesla has to be cautious about diluting its high-end brand with too many entry-level models. “Porsche and Lotus lose their cachet if they pump out too many cars and everybody on the block has one,” Gott said.

Of course, Porsche has done fairly well by broadening its base with affordable cars like the Boxster and America-friendly ones like the Cayenne SUV, and I don’t think the brand has yet succumbed to the Kmart effect.

Tesla has both challenges and opportunities here. It has lost money every year since it was launched in 2003, and after going through more than $230 million (and losing almost $30 million in the first quarter of this year) it’s cash-poor. So is CEO Elon Musk, a paper billionaire, who is going through a difficult divorce. He said in court papers filed earlier this year, “About four months ago, I ran out of cash.” To support his family, he said, he had to take out emergency loans from friends, and listed liquid assets of under $650,000.

But Musk isn’t headed for the poorhouse, and Tesla Motors will be with us for a long while. “The IPO is a very important milestone,” said Oliver Hazimeh, the e-mobility practice leader at PRTM Management Consultants. “There haven’t been any EV IPOs, unless you count the successful offering from battery maker A123. Tesla is the new kid on the block, and this puts the company’s name on the map.”

Tesla’s on the map alright -- it’s by far the best-known electric vehicle, thanks to an endlessly interested press. That helps the money to roll in. But as David Abella of Rochdale Investment told BusinessWeek, the excitement and hype over electric vehicles makes it “a pretty good time to try the IPO.”

In some ways, Tesla is on a roll, having secured a $465 million federal Department of Energy loan. It also got a $50 million investment from Daimler (half of which was then spun off to the government of Abu Dhabi), and another $50 investment million as part of a partnership with Toyota on EVs that included buying the huge, mothballed NUMMI plant (which was jointly operated GM and Toyota) in California. “They wouldn’t have gotten involved with NUMMI if they were going to stay a niche manufacturer,” Gott said.

There’s nothing wrong with Tesla that a lot of sales won’t cure. That’s why the company needs to bet on a) rising gas prices; and b) government help, in the form of new legislation that will subsidize both early adopters buying cars and cities that want to set up charging stations. Two Department of Energy-supported projects, both offering free chargers to municipalities, are already doing that on a relatively small scale. But much larger efforts depend on getting a bill through Congress.

So Tesla, whose IPO (with shares at a midpoint price of $15) is being shepherded by Goldman Sachs, Morgan Stanley and JPMorgan Chase, needs to handle its new cash carefully. Electric vehicles could take off, but they’re unlikely to do so in the first couple of years. As the company prepares to roll out the Model S (and new models are always a frighteningly expensive prospect) it also needs to hoard some assets for the long haul.