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Tesla IPO: What the Toyota-NUMMI Deal Could Mean for Tesla's Public Offering

Tesla Motors, the Silicon Valley electric car startup that filed for an initial public offering back in January, has a stellar brand, a sexy car and heavyweight backers including Uncle Sam and most recently, Toyota. The startup said late Thursday that Toyota has agreed to invest $50 million in Tesla after the closing of its planned IPO, for an estimated 2.5 percent stake. How will this pairing with the hybrid leader, combined with Tesla’s latest plans for manufacturing the Model S electric sedan, affect how Tesla fares on Wall Street?

In addition to the Toyota investment, Tesla — which scored a conditional commitment for $465 million in loans from the Department of Energy last summer — also announced yesterday that it plans to buy, for an undisclosed sum, the NUMMI plant in Fremont, Calif. (until recently the home of Toyota’s joint venture with General Motors (s GM)). The startup expects to spend “a couple of hundred million dollars,” retooling the facility and aims to begin building its long-planned Model S electric sedan in “a little corner” of the plant in 2012. Tesla and Toyota also plan to “form a team of specialists” to “cooperate on the development of electric vehicles, parts, and production system and engineering support.”

If and when Tesla goes through with its plans to raise up to $100 million in an IPO, a number of factors will affect how Wall Street responds to the offering, including the state of Tesla’s brand and financial performance. Also affecting it will be the degree of confidence investors have that the market for electric vehicles will grow, and that Tesla will succeed in leaping from upstart car maker to large-scale manufacturer, become a profitable venture and be able to compete with legacy automakers. This week’s deal with Toyota and the decision to buy NUMMI plays into each of those assessments.

Road to Profitability

Tesla’s road to profitability runs directly through mass production of the Model S, and finalizing the plans for manufacturing at NUMMI will be a critical step toward that goal. As Tesla CEO Elon Musk commented in a statement Thursday, the startup will be able to learn and benefit from “Toyota’s legendary engineering, manufacturing, and production expertise.” With Toyota around to guide Tesla through the foreign territory of setting up large-scale manufacturing, perhaps potential investors will feel some of the risk inherent to investing in a startup with no track record of producing vehicles on the scale that it needs to turn a profit is mitigated somewhat.

The move is also a step toward accessing DOE funds on which Tesla is relying to launch the Model S. Under its agreement with the feds, Tesla notes it cannot draw all $465 million “at once, but only over a period of up to three years through periodic draws as eligible costs are incurred,” and only then if Tesla meets certain conditions, including approval of a Model S factory site under environmental regulations.

Time Crunch on the Model S

Tesla faces a time crunch to complete this site selection and approval process in order to enter “volume production” and begin deliveries of the Model S in 2012 — a deadline that’s critical for Tesla to hit if it’s going to generate significant revenue in the near future. Using the existing Fremont plant rather than a facility in Downey, Calif. (which Tesla was also eyeing but would have taken at least 18 months to convert for Model S assembly) could help accelerate that process.

As Tesla explained in its S-1 filing, would-be customers for the Roadster have historically canceled reservations after production delays. More importantly, a delayed Model S launch would push back the next-gen Roadster, which Tesla doesn’t plan to introduce until at least one year after Model S production begins. According to the S-1, “The launch of our Model S could be delayed for a number of reasons and any such delays may be significant and would extend the period in which we would generate limited, if any, revenues from sales of our electric vehicles.”

Cultivating Powertrain Customers

Tesla has long discussed plans to build up a powertrain supply business as an additional revenue stream to selling cars (and zero-emission vehicle credits). One of the other conditions for Tesla to draw some of the DOE loan funds is signing up commercial customers for powertrain components. While the development and engineering aspect of this week’s deal with Toyota represents a significant coup for Tesla, the full scope of Toyota’s commitment to the startup — and whether the joint development work will lead to a commercial supply contract — remains to be seen. We’ve reached out to Tesla asking for more details on the extent of collaboration planned under the agreement with Toyota, and whether the startup expects to supply battery packs and powertrains for Toyota vehicles.

Tesla won its first deal with a major automaker about a year ago, when Daimler (s DAI) bought a 10 percent stake in the company with an investment of $50 million (Daimler later sold 40 percent of its stake to Abu Dhabi’s Aabar Investment). Daimler has tapped Tesla to supply up to 1,500 battery packs and chargers for a trial of the German automaker’s electric Smart Fortwo, and the pair agreed to share expertise for future models. But as Tesla acknowledged in its prospectus, “There is no guarantee that we will be able to secure future business with Daimler as it has indicated its intent to produce all of its lithium-ion batteries by 2012 as part of a joint venture with Evonik Industries AG. If Daimler goes through with this, we are likely to lose the only customer in our powertrain business.”

History of Losses, Future Expenses

Tesla lost $260.7 million from its inception through the end of 2009, has sold just over 1,000 cars, and will likely lose many millions of dollars more as it retires its current-generation Roadster next year and strives to produce the more mainstream and lower-cost Model S.

Under its agreement with the DOE, Tesla must spend up to $33 million “plus any cost overruns” for the two government-supported projects (the Model S project and a powertrain facility). The startup is also obligated to direct half of the net proceeds from the IPO to an account dedicated to its DOE-backed project, although the feds will later reimburse those costs. Tesla said in its latest filing with financial regulators that it expects to make aggregate capital expenditures between $100 million and $125 million during the 2010 calendar year.

Big-name Backers and Branding

Of course, there are non-financial factors worth considering as well. As Tesla noted in its S-1 filing with financial regulators, it’s “the first, and currently only, company to commercially produce a federally-compliant highway-capable electric vehicle.” It has wider brand recognition than just about any other greentech startup, thanks to its early entry in the green car space and the fact that its inaugural product was a sexy, high-performance sports car that exploded old notions of electric vehicles as dull, ugly and slow.

The company also scored a $465 million vote of confidence in its ability to scale up production from the federal government. That came in the form of low-interest loans under a highly competitive program meant to support the growth of a green car manufacturing industry in the U.S. And now, to cap it all off, Tesla has Toyota in its corner and plans to fill part of the gap left by former Toyota joint venture partner General Motors (s GM) at the NUMMI plant in Fremont.

The alliance with Toyota is also increasing Tesla’s brand recognition, while the plans to reopen at least a portion of the NUMMI plant casts Tesla in the celebrated role of a company bringing manufacturing work to an area slammed by the loss of more than 4,700 jobs when the factory shuttered. The company plans to hire about 50 workers each month for a total of 1,000 employees by the time production starts in 2012. Eventually Musk believes the partnership with Toyota could result in 10,000 jobs — about half of them with Tesla and half through suppliers.

So while the startup faces serious hurdles on the road to building a long-term sustainable business, it also has serious momentum that’s only increasing. Will this week’s deal mean the birth of a behemoth in the next generation of greener cars? That will depend in part on how this alliance between the hybrid leader and the poster child of electric cars evolves, and how the nascent market for these vehicles takes shape.

Images courtesy of Tesla Motors

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