Shares of Twitter (NYSE:TWTR) closed Friday at $49.02, which corresponds to a discount of $5.18 against the offer price of $54.20 from the social media giant’s Tesla (NASDAQ:TSLA) CEO. The presence of this large arbitrage lends credence to the hypothesis that the market is currently underestimating Elon Musk’s ability to close the Twitter acquisition deal.
As most of our readers know by now, Elon Musk plans to make Twitter private at $54.20, which equates to a bargain price of about $43 billion. The following chart details the various sources of funding that the Tesla CEO has now used to close his Twitter acquisition deal.
As it turns out, Musk is required to raise about $21 billion from his own resources, and the remaining $22 billion is expected to materialize in loans.
Before finalizing the terms of the Twitter deal, Musk had $3 billion in cash on hand. Over the past few days, Musk has liquidated 9.645 million shares of Tesla, making about $8.5 billion in the process. However, this wave of liquidation has put Musk’s margin loan financing of the Twitter deal at risk. Let’s go deeper.
Margin loan for Twitter deal requires Tesla CEO to pledge $62.5 billion in equity
The $12.5 billion margin loan facility that Musk used to plug the liquidity gap for his Twitter acquisition deal has a loan-to-value ratio of 20 percent. This means that the CEO of Tesla has to post guarantees of at least $62.5 billion. Crucially, this guarantee must be unrelated to any other obligation, thus precluding Musk’s significant exposure to Tesla in the form of options.
After the latest liquidation round, Musk now owns 162.963 million shares of Tesla, valued at $141.901 billion, based on Friday’s closing price. However, more than half of Musk’s total stake in Tesla has already been pledged to guarantee existing personal loans.
According to a Bloomberg calculation, if Tesla’s stock price drops below $837, Musk will not be able to post enough collateral to facilitate the margin loan, jeopardizing the entire financial arrangement to make Twitter private.
Of course, Musk could use his cash of about $3 billion in addition to the $8.5 billion recently raised from the sale of Tesla stock to pay off existing debts, thus freeing a significant portion of his stake in Total Tesla from any burdens related to previous loan covenants. This would allow MASK to comfortably meet the margin loan collateral requirements. However, this path also has negative aspects.
Musk is obligated to raise at least $21 billion from his own resources
If Musk follows the path we detailed in the paragraph above, he will have to raise the entirety of $21 billion, or at least a large portion of this funding tranche, by selling additional Tesla shares. Here, however, an analogue in late 2021 could give us an idea of the carnage that can be expected from such a massive liquidation. For intelligence, Musk sold more than 13.5 million shares of Tesla stock in late 2021 to pay more than $11 billion in tax obligations. That liquidation, which netted Musk more than $14.1 billion, severely affected Tesla’s stock price, with the stock posting a loss of more than 26% between early November and late December 2021.
As we noted in a recent post, given the deteriorating macroeconomic environment, punctuated by a hawkish Federal Reserve that is determined to tame the rising inflationary impulse by striking out risky assets to limit the wealth effect spread across the US economy, Musk’s $21 billion liquidation in Tesla stocks will have Much greater effect.
Of course, Musk indicated in a recent tweet that he won’t be selling any more Tesla stock in the near term.
No more TSLA sales planned anymore
– Elon Musk April 29, 2022
However, this commitment complicates Twitter’s overall funding picture. However, there is still a way out for the CEO of Tesla – cooperation with private equity firms. According to a Reuters report, a large number of private equity firms are now lining up to partner with Musk, thus relieving the funding pressures inherent in the Twitter acquisition:
One of the sources said: “Musk has been inundated with offers from potential equity partners to join him in the Twitter deal, and will decide in the coming weeks whether to collaborate with someone.”
Regardless of how this situation develops, Tesla’s stock is likely to remain in flux for the foreseeable future, increasing the likelihood of red days coming.