Rich people rarely have to pay cash.
Tesla CEO Elon Musk has a lot of options to finance a
Twitter purchase, even if he needs to up his offer.
Some have wondered if Musk is already leveraged to the teeth, putting him at a disadvantage against other buyers or limiting the amount he can pay.
That assertion comes from Tesla (ticker: TSLA) filings with the Securities and Exchange Commission.
Tesla has a policy in place of letting directors and officers only borrow up to 25% of the value of their stock. And Elon Musk has already pledged about 88 million shares against indebtedness, according to Tesla’s 2021 proxy filing. That leaves him with only another 85 million shares to raise debt with.
The 85 million shares are worth, very roughly, $84 billion. At 25% margin debt, that gives him $21 billion of credit. He needs about $40 billion to buy the part of
Twitter (TWTR) he doesn’t own.
He looks short, but that math is a little flawed. Musk pledged the stock back in 2019 and 2020, when the shares were worth perhaps $6.5 billion. The maximum loan then would have been roughly $1.6 billion. Tesla stock is worth more now. Shares gained 743% in 2020 and another 50% in 2021.
“As his pledged stock increases in value, his net assets increase correspondingly. As his pledged stock appreciates, his credit capacity will also increase,” explains accounting expert and long time Wall Street researcher Robert Willens. “The increase in the value of the stock can be accompanied by an increase in credit since the loan-to-value ratio, which is the critical metric, will stay at or below the ceiling amount.”
So Musk can very likely borrow the entire amount to buy Twitter against his Tesla stock. But he probably won’t. Tesla hasn’t returned multiple request for comment about its CEO and Twitter, including one on Saturday morning.
Willens also points out another option: Musk can create a new corporation where Musk can put his Twitter holdings as equity. “The new corporation might receive additional equity contributions from Mr. Musk, but will borrow the remainder of the amount needed to pay off the other [Twitter] shareholders,” adds Willens. There is more debt available than just what Musk can borrow against his Tesla stocks. “That would be the way most [leveraged buyouts] are accomplished and this acquisition would certainly fall within that category.”
Future Fund Active ETF
portfolio manager Gary Black points out that Musk can also seek financing from private equity partners. “PE firms will put their own equity into the deal, or as Elon said, many of those invested in public [Twitter] could ride along as private holders in an Elon-owned private,” wrote Black in a Friday tweet.
Oracle (ORCL) co-founder Larry Ellison and private-equity firm Thoma Bravo could join with Musk and raise up to $50 billion, Bloomberg reported Sunday.
The $50-billion figure implies a much higher price for Twitter stock, almost $73 a share. If the $50 billion is for all of Twitter, including Musk’s existing stake, the implied price is about $65 a share. Twitter shares were above $70 just last summer.
Musk also has an estimated $50 billion worth of SpaceX stock. That is another source of debt or outright cash if he was to sell some of those shares.
Of course, he could just sell some of his unpledged Tesla stock. That’s the outcome that would really nettle Tesla investors. Tesla stock reacted negatively, down about 16% in two days, after Musk in November ran a Twitter poll asking if he should sell 10% of his stake to pay taxes on unrealized capital gains.
Musk has yet another source of fund: Stock options. Musk receives most of his compensation for running the electric vehicle leader in stock options. He was awarded roughly 100 million options to purchase Tesla stock for about $70 a share back in 2018. About three-quarters of those options are vested.
The most likely option for Musk is a mix of cash and debt with private equity partners. Tesla stock sales probably aren’t in the cards.
The bottom line: Elon Musk has enough fire power to swallow Twitter whole.
Tesla stock closed down 3.9% this past week. Twitter shares rose 2.5%. The
Dow Jones Industrial Average
fell 2.1% and 0.8%, respectively.
In early trading Monday, Tesla shares were down 0.7%. The S&P 500 was up 0.2%.
Write to Al Root at [email protected]