Can Elon Musk Even Afford Twitter As Tesla Shares Tank?

But Twitter Stock Your Capital Is At Risk
Tim Worstall
Updated: 13 May 2022

Key points:

Twitter (NYSE: TWTR) stock is about $9 billion, or even $9 a share, below the cash bid from Elon Musk. This roughly 20% discount to a cash bid is a signal that the market as a whole isn’t sure that the bid is actually going to go through. The problem is the tanking Telsa (NASDAQ: TSLA) stock price which is down 25% and counting in only a month.

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This then gives us an idea of how to trade that Twitter stock. As Musk continues to replace a margin loan secured on his Tesla stock with equity commitments from elsewhere then we should see the Twitter stock price rise to that offer price. We would also likely see a corresponding, but lower, rise in the Tesla price.

The background problem here is that $44 billion is a lot even for the world’s richest man. More especially since his wealth is near all tied up in other investments. SpaceX, The Boring Company, the AI one, they’re all private companies at present and so very hard to borrow against. This makes his major asset that he can raise money against his Telsa stock. And, sure, he’s got a lot of it but some of that is already pledged against other loans.

So, in order to buy Twitter, he has had to put up some cash of his own. Plus some equity from others. Plus borrowings against the value of Twitter itself – debt that Twitter will be paying off post takeover. But there’s still a gap between all of those resources and the Twitter bid at $4 billion or $54.20 a share. That gap has to be filled by further loans secured against Musk’s Telsa stock. But there’s not a lot of that stock left unpledged at the sort of margins that would make a lender happy.

Also Read: 10 Best Stock Traders To Follow on Twitter in 2022

Further, the total value of that Tesla stockholding has been falling – 25% and more in this past month alone. The debt secured against it already hasn’t fallen, meaning that the amount available to be pledged against Twitter is what takes the strain.

This then becomes a spiral. Musk must pledge more TSLA to buy TWTR, that makes the Tesla stock price more fragile, Musk must pledge more again, and so on.

The answer to this is if Musk can find the equity component elsewhere, without having to secure a margin loan against his TSLA stock. Which he might be able to do if he can bring in more equity investors. He’s having some success at this as well. The original $12.5 billion margin loan has already been cut in half as he’s secured $7.1 billion in equity commitments.

The current gossip is that Musk is still in talks with further investors which might mean he’s able to cut that call on the margin loan – thus TSLA stock – to nothing.

Whether this will happen is another thing. But if it does we’d expect the Twitter stock price to rise to something very close to that $54.20 cash bid. Further, we’d expect at least some recovery in the Tesla price as possible selling pressure came off there.

It is strange here but it is indeed true. The TWRT share price currently depends upon whether the world’s richest man can convince folk that he’s not got enough money himself so would people like to join in with this takeover? The more Elon Musk convinces people that he’s not going to do it on his own the higher the Twitter – and Tesla – prices will be.

UPDATE: Elon Musk has this morning tweeted to say that the Twitter deal is temporarily on hold pending details supporting the calculation that spam/fake accounts do indeed represent less than 5% of users. Twitter stock is down 24.5% premarket.

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