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Given the funding dynamics around Elon Musk’s Twitter takeover gambit, it is hardly a surprise that a number of hedge funds are trying to exploit this deal arbitrage opportunity by shorting Tesla shares and going long on Twitter, especially as Twitter shares are currently 8 percent below the offer price of $54.20 per share. However, Tesla can feasibly shred such hedge funds’ arbitrage playbook by announcing a share buyback program.
On the 04th of October, Elon Musk performed an admirable volte-face and announced his willingness to adhere to the original Twitter takeover terms, including the previously agreed upon purchase price of $54.20 per share. Soon thereafter, the Delaware Court of Chancery postponed the trial between Elon Musk and Twitter until the 28th of October in order to allow both parties to close the takeover agreement. The trial had been precipitated by the CEO of Tesla’s unilateral decision to walk away from the agreement to take Twitter private while citing the uncertainty surrounding the quantum of bots or fake accounts that presumably populate Twitter’s monetizable Daily Active Users (mDAUs) metric – an allegation that was negated by the two independent experts appointed by Musk himself.
Meanwhile, this delay will allow Elon Musk to try to secure the requisite $13 billion in debt financing for the $44 billion deal – a difficult task in a world rocked by soaring interest rates and broader bond market turmoil. Of course, debt financing is only one aspect. The CEO of Tesla also needs to secure $24.51 billion in equity financing. In April-May, Elon Musk sold around $8.5 billion worth of Tesla shares to fund his equity commitments under the original Twitter takeover deal. Then, back in August, the CEO of Tesla sold $6.9 billion worth of Tesla shares. This means that he has so far accumulated $15.4 billion in funding by selling a portion of his Tesla stake. Musk has also secured $7.1 billion in equity commitments from the likes of Larry Ellison, Binance, Sequoia, the Saudi Prince Al Waleed, etc. However, this still leaves a $2 billion deficit without accounting for Twitter’s RSUs – which will increase this equity shortfall to around $5.4 billion.
Given these funding dynamics, it is quite likely that Elon Musk will have to sell Tesla shares worth billions of dollars soon after the EV giant’s earnings later this month to secure the requisite funds to close the Twitter takeover deal. Hence, the arbitrage play by hedge funds of going long on Twitter while shorting Tesla is entirely reasonable.
Even a small (~$10B) $TSLA share buyback would get Institutional SHs excited since it sends a message that TSLA will do the right thing with excess cash flow (FY’23 $21B). After #btc and $TWTR disasters, TSLA Board will want to add some SH value. @hiromichimizuno @MartinViecha pic.twitter.com/TqChyKFf6Z
— Gary Black (@garyblack00) October 7, 2022
However, Gary Black, the managing partner at the Future Fund LLC, is of the opinion that Tesla can easily blow up this play by announcing a share buyback program at its Q3 2022 earnings disclosure.
According to Black’s tabulation, Tesla will have $9.932 billion in free cash flow for FY 2022. However, for FY 2023, this metric is expected to increase to $20.773 billion, providing a sufficient cushion for the EV giant to start reinforcing value to shareholders.
Should this occur, Tesla will likely unleash a “rip-your-face-off rally” once the Twitter takeover overhang clears by the end of this month, blowing up hedge fund shorts in the process.
2/Normally during the 3rd mo of the qtr, there are almost no China exports - production fills local sales (in Mar and June, exports were <1K).
We expect 4Q China delivs (130K) and production (255K) to be records. Our $TSLA 4Q delivs are 430K. Our FY’22 delivs 1,340K (+43% YoY).
— Gary Black (@garyblack00) October 12, 2022
Moreover, with likely record deliveries in China expected in Q4, Tesla has almost cleared up the pall cast by the recent Q3 delivery numbers from the Asian giant.