- Musk’s Twitter takeover is financed partially by a huge loan secured against his Tesla shares.
- He cut this loan in half with additional funding, but as Tesla shares fall, the deal looks shakier.
- If Tesla stock drops below $420, Musk won’t have enough to cover the loan, Bloomberg reported.
If Tesla shares continue to drop, Elon Musk might not have enough money to buy Twitter.
Musk’s takeover relies on a $12.5 billion loan secured against his Tesla shares. But plummeting tech stocks have imperiled this crucial part of the deal. Tesla has slumped more than 20% to $769 since the loan agreement was signed in April. If it falls below about $420, Musk wouldn’t have enough unpledged Tesla stock to cover the margin loan, Bloomberg calculated on Thursday.
This creates a foreboding though not unavoidable risk for Musk. He’s raising an additional $7.1 billion from Sequoia Capital, Qatar, Oracle founder Larry Ellison, and Saudi Prince Alwaleed bin Talal, whittling the margin loan down to $6.25 billion. Without that, Musk would already have run out of collateral when Tesla dropped below $837, which it did last Friday.
The billionaire may also be able to eliminate this margin loan altogether via another round of financing, although that route would likely come with punishing interest rates of as much as 14%, according to Bloomberg. And there’s already concern about how Twitter, with its meager record of profitability, would be able to pay off such pricey debt.
The market is betting that the deal will fail, or at least get repriced much lower. On Friday, Twitter shares closed at $40.72. That’s a 25% discount to Musk’s $54.20 per share offer on April 25.
On Friday morning, Musk tweeted that the deal was “temporarily on hold” to check if spam and fake Twitter accounts make up less than 5% of the company’s total users. A little over two hours later he tweeted that he was “still committed to acquisition.” However, this smacked of buyer’s remorse, or some sort of effort to renegotiate the purchase price, and triggered a sudden 25% slump in Twitter’s stock.
The deal can still fall through, but the terms of the agreement would make that expensive for Musk. In addition to a $1 billion breakup fee, Twitter can sue him for damages and breach of contract and collect more than the $1 billion, according to CNBC.
“While I expect the deal to close, we need to be prepared for all scenarios and always do what’s right for Twitter,” Parag Agrawal, the company’s CEO, wrote on Friday.
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