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Twitter (NYSE:TWTR) shares closed on Friday at $49.02, corresponding to a discount of $5.18 relative to the offer price of $54.20 from the CEO of Tesla (NASDAQ:TSLA) for the social media giant. The existence of this sizable arbitrage lends credence to the hypothesis that the market is currently discounting Elon Musk’s ability to close his Twitter takeover deal.
As most of our readers would know by now, Elon Musk plans to take Twitter private at $54.20, equating to a deal price tag of around $43 billion. The following infographic details the various funding sources that the CEO of Tesla has now tapped to close his Twitter takeover deal.
As is evident, Musk is required to cough up around $21 billion from his own resources, with the residual $22 billion expected to materialize in the form of loans.
Prior to the finalization of the Twitter deal terms, Musk had $3 billion in on-hand liquidity. Over the past few days, Musk has liquidated 9.645 million Tesla shares, netting around $8.5 billion in the process. However, this liquidation spree has endangered Musk’s margin loan financing for the Twitter deal. Let’s delve deeper.
Margin Loan for the Twitter Deal Requires the CEO of Tesla to Pledge Shares Worth $62.5 billion
The $12.5 billion margin loan facility that Musk has tapped to fill the liquidity gap for the Twitter takeover deal has a loan-to-value ratio of 20 percent. This means that the CEO of Tesla has to post collateral of at least $62.5 billion. Crucially, this collateral has to be unencumbered by any other obligation, thereby precluding Musk’s sizable exposure to Tesla in the form of options.
After the latest bout of liquidation, Musk now owns 162.963 million Tesla shares worth $141.901 billion, based on Friday’s closing price. However, over half of Musk’s total Tesla stake is already pledged to underwrite existing personal loans.
As per the calculation by Bloomberg, if the Tesla stock price were to fall below $837, Musk won’t be able to post sufficient collateral for the margin loan facility, thereby jeopardizing the entire financial arrangement to take Twitter private.
Of course, Musk can use his existing on-hand liquidity of around $3 billion plus the $8.5 billion recently raised from selling Tesla shares to pay down existing debt, thereby releasing a significant chunk of his Total Tesla stake from any encumbrances related to prior loan pledges. This would allow Musk to comfortably meet his margin loan collateral requirements. However, this route also entails downsides.
Musk Is Obligated To Raise at Least $21 Billion From His Own Resources
If Musk follows the route we detailed in the para above, he would have to raise the entire $21 billion, or at least a sizable chunk of this funding tranche, by selling additional Tesla shares. Here, however, the analog of late 2021 can give us an idea of the carnage that can be expected from such a hefty liquidation. To wit, Musk had sold over 13.5 million Tesla shares in late 2021 to pay over $11 billion in tax liabilities. That liquidation, which had netted Musk over $14.1 billion, severely impacted Tesla’s share price, with the stock registering a loss of over 26 percent between early November and late December 2021.
As we had noted in a recent post, given the deteriorating macroeconomic environment, punctuated by a hawkish Federal Reserve bent on taming soaring inflationary impulse by hammering risk assets to reduce the wealth-effect pervading throughout the US economy, Musk’s liquidation of $21 billion in Tesla shares will have a much more sizable impact.
Of course, Musk indicated in a recent tweet that he would not be selling any more Tesla shares in the near term.
No further TSLA sales planned after today
— Elon Musk (@elonmusk) April 29, 2022
This commitment, however, complicates the overall funding picture for Twitter. Nonetheless, there is still a way out for the CEO of Tesla – team up with private equity firms. As per the reporting by Reuters, a large number of PE firms are now lining up to partner with Musk, thereby alleviating the funding pressures inherent in the Twitter takeover deal:
“Musk has been inundated with offers from potential equity partners to join him in the Twitter deal, and he will decide in the coming weeks if he teams up with someone, one of the sources said.”
Regardless of how this situation unfolds, Tesla shares are likely to remain in flux for the foreseeable future, increasing the likelihood of red days ahead.