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Tesla's Cozy Relations With Banks Have Lost That Loving Feeling

by David Welch | Bloomberg | 10-07-2016

Goldman Sachs Group Inc. downgraded Tesla Motors Inc., ditching a buy rating it placed on the stock in May as the investment bank co-managed a $1.4 billion stock offering for the electric-car maker. Shares fell the most in five weeks.

Goldman analyst David Tamberrino cut Tesla to “neutral” from a “buy” in a note Thursday, saying that the proposed merger with SolarCity Corp. makes Tesla a riskier bet. The bank lowered its price target to $185 from $240, helping send Tesla shares down as much as 4 percent, the biggest intraday drop since Sept. 1.

Tamberrino’s downgrade comes at a pivotal time for Tesla. The company will soon put its SolarCity deal to a vote with shareholders and try to raise more cash. That may be complicated by the fact that Morgan Stanley and Goldman, the two banks who have been lead underwriters on most of its deals, have both dropped “buy” ratings since their last offering.

“We now see incremental risk to the business related to management’s willingness to deploy capital for M&A, and we believe that any delay in the company’s timeline to launch its new Model 3 will be detrimental to the shares,” Tamberrino wrote in the report.

Needing Cash

Goldman spokeswoman Leslie Shribman said in an e-mail that the bank’s research is done independently from its underwriting.

“We followed all of our standard policies and procedures with respect to our research publication today,” she said.

Tesla Chief Executive Officer Elon Musk plans to raise more cash in the fourth quarter or early next year as the company works on development of the Model 3 sedan, an affordable car designed to get electric drive technology to the masses. He will also need money if the SolarCity deal is approved because the two companies have burned a combined $2 billion in the first half of this year.

For a QuickTake explainer on clean cars, click here.

Analysts estimate that Musk will need to raise as much as $2 billion. The combined cash needs of both companies are a key reason why some shareholders have left the stock. Shares fell more than 10 percent on June 22, the first trading day after Tesla announced the proposed merger.


Musk, the billionaire co-founder of Paypal Inc., has been trying to burnish the company’s image in preparation for another stock or debt offering. On Aug. 29, he sent an e-mail to employees urging them to cut costs and deliver “every car we possibly can,” according to the e-mail, which was obtained by Bloomberg. Tesla said Oct. 2 that it shipped about 24,500 vehicles in the third quarter, topping analyst estimates for deliveries.


May Upgrade

Goldman analyst Patrick Archambault upgraded Tesla on May 18 -- the same morning that Tesla launched its secondary stock offering. Goldman and Morgan Stanley were lead managers on the deal, and Goldman said at the time that the call was made independently of the underwriting team.

Separately, Goldman’s fund managers were dumping Tesla shares during the second quarter. The New York-based bank cut its ownership in half to 1.4 million shares in the period ended June 30, regulatory filings show. Goldman remains one of Tesla’s 20 largest holders, with just under 1 percent of the stock.

Since he had upgraded the stock, Archambault has left Goldman. Tamberrino was on his team at the time.

Goldman wasn’t the first Tesla underwriter to issue positive research near an equity offering. In August of last year, the company hired Morgan Stanley as one of the lead managers of the $783 million offering, priced at $242 a share. Three days after the announcement, Morgan Stanley analyst Adam Jonas raised his estimated future price for the stock to $465 from $280.

His rationale was that Tesla’s self-driving electric cars could help create a ride-sharing business that would make the company a major player in the industry. He has since downgraded the stock, citing the SolarCity deal as a risk and saying that Tesla’s emergence as a ride-sharing leader looks less certain and could take a long time.