Ilona Maska’s deal with Twitter has features that make it risky, including billions of dollars in personal debt. If all goes wrong, it could burn Tesla’s shareholders and damage Twitter’s financial health.
There are already signs of investor concern. As Tesla has become one of the most valuable companies in the world, its shares have become widely owned by retail investors through mutual funds and other investment funds. But after it became known early last month that Musk had acquired a significant stake in Twitter, it fell 24%, at a time when the S&P 500 was down 9.5%.
“Even if he can fund it, it’s just an unreasonable deal from a financial standpoint,” said Aswat Damadaran, a professor of finance at Stern School of Business at New York University.
Musk has demonstrated that he can create two big successful companies at once: after some setbacks, Tesla sells far more electric vehicles than any competitor, and SpaceX is a leading rocket company. And maybe it will be able to make Twitter more popular and profitable.
But Tesla shareholders are going to find out what happens when the CEO along with his other responsibilities becomes overseer of the battlefield online.
Tesla shares are part of the deal.
Although Musk and his partners are investing more than $ 20 billion in cash to buy Twitter, he also intends to raise money by taking out a $ 6.25 billion loan secured by Tesla shares, compared to $ 12.5 billion. billion dollars in the preliminary plan of financing the deal.
Analysts said it was difficult to come up with another deal in which an individual took on such a large debt on shares – known as a margin loan – to help pay off another company.
The terms of the loan may change, but those that were disclosed at the beginning of the process show that the lenders believed it was a potentially risky part of the deal. The statement said that the banks demanded from Mask to repay the loan with Tesla shares in the amount of five times more than the cost of the loan, which gives them a lot of pillows. The loan also had an advance commission of 0.5% and an interest rate of over 3%. Vicki Brian, CEO of research firm Bond Angle, said the conditions were “very tough”.
Banks may be wary because they have already borrowed the Mask. An application Monday revealed that by the end of last year, before making its bid on Twitter, Musk had promised more than 92 million shares to secure personal loans, though the statement did not specify how much he borrowed, if anything.
Musk did not respond to a request for comment on the article.
Margin credit can go wrong.
A margin loan to buy Twitter could be a destabilizing factor if Tesla’s stock price falls. The sharp decline could encourage banks to sell their shares to repay the money they lent to Mask, which in turn could trigger even greater sales in the market. In terms of loan margins, Musk argued that he should repay all the debt if Tesla shares fall by more than 40% of the value on the day of the loan.
Tesla’s business is doing well, so analysts do not expect the collapse of its shares. In the first three months of 2022, 75% of electric vehicles sold in the United States were Tesla, according to Cox Automotive.
Recently, traditional carmakers such as Ford, Hyundai and Kia are selling attractive electric vehicles, and most analysts expect Tesla’s market share to decline. But this has not yet happened. On the contrary, Tesla’s market share in the first quarter was even higher than a year earlier, when it accounted for 70% of EV’s domestic sales.
“No one will have 100% market share forever,” said Michelle Krebs, executive analyst at Cox. “They will have competition. On the other hand, every time we said that, no one really challenged them. “
But some analysts see weaknesses in Tesla’s business, including a shortage of new products and ongoing quality issues, and they say the loan margin adds strength that could boost Tesla shares.
“Now he’s added another layer of risk because he promises more stocks,” Brian said.
Twitter can be a distraction.
Twitter can distract Mask from managing the car company and its other businesses. This risk is especially acute when platform management becomes a headache and leads to inconsistencies that distract or alienate potential Tesla customers.
Some shareholders say Mask’s unconventional Twitter posts – he once made a comparison between Justin Trudeau, the Prime Minister of Canada, and Hitler – have already hurt Tesla.
“The guy said so many controversial things,” said Christine Hall, founder and CEO of Nia Impact Capital, a fund in Auckland, California that invests in companies with positive social impact. “Are they distracting? Are they confused? Did he interfere in the stock price through his tweets? Absolutely. ”
When Musk became the owner of Twitter, “it only gets bigger,” Hal said. Nia recently sold most of its shares in Tesla, she said, because the fund was unhappy with the company’s reaction to accusations of racism at its plant in Fremont, California.
Mask’s ownership of Twitter may repel some potential Tesla buyers. According to research firm Morning Consult, among people considering buying an electric car, Democrats outnumber Republicans by nearly 2-1. But Democrats are also a group that is likely to be postponed if Musk, in the name of free speech, opens Twitter to extremist views or misinformation.
The acquisition of Twitter could strengthen control over the Mask by stock market regulators. He was sued by a Twitter shareholder who accused him of missing the regulatory deadline to report that he had accumulated 5% stake in the platform.
The lawsuit, filed by Boston-based law firm Block & Leviton, alleges that Musk saved tens of millions of dollars by waiting six days after the deadline to disclose his stake. He was able to continue to buy Twitter shares cheaper than would have been possible if his interest had been publicly available, the lawsuit alleges.
Musk has a long history of antagonism with the Securities and Exchange Commission. Last month, he failed to persuade a New York judge to release him from a 2018 deal with the SEC that requires a company lawyer to check his posts on social media if statements could change Tesla’s share price.
By buying Twitter, “you put yourself in front of the SEC,” said Chester Spet, a professor of finance at the Tepper School of Business at Carnegie Mellon University. “It’s easy to imagine the SEC saying,‘ This guy is a serial criminal. What else do we need to do? ‘”
The deal could turn into a money pit.
Musk could change Twitter, but if he doesn’t, the company could have a hard time repaying $ 13 billion in new debt that the company is expected to take on according to the deal’s plans.
If Twitter’s finances get tough and he struggles to pay off new debt, Mask and any other company owners will have to decide whether to provide more financial support. He could borrow more under his Tesla shares, sell some of them or even borrow under other valuable assets, such as his stake in SpaceX, which could be worth more than $ 40 billion.
“It is clear that the company cannot bear this debt,” Damadaran said on Twitter.
about 2022. The New York Times Company