Elon Gets a Boost From Friends For His Twitter Buyout—And Takes *Some* Of The Heat Off Himself
Elon Gets a Boost From Friends For His Twitter Buyout—And Takes *Some* Of The Heat Off Himself
Elon Musk got 19 friendly investors to pledge $7.1 billion toward his buyout of Twitter. He also persuaded his bankers to slash his margin loan—as I projected. Still $20+ billion to go.
Elon Musk reported in an SEC filing on Thursday that he had marshalled some $7.1 billion from 19 friendly investors to help him buy Twitter (TWTR) for $44 billion and take it private (see Twitter: Take the Money And Run).
This included existing Twitter investor Saudi Prince Alwaleed bin Talal, chairman of the board at Kingdom Holding Company, who initially had rejected Elon’s $54.20 bid as not even “come close to the intrinsic value.”
Now he will lead the pack of new investors by rolling in his 35 million share stake worth about $1.9 billion.
The rest are buying in with cash, led by a $1 billion investment from billionaire Larry Ellison, Tesla (TSLA) board member and longtime Elon fan—much like the rest of the list:
CEO Changpeng Zhao of Binance Holdings (BNB-USD), the world’s largest cryptocurrency exchange, tweeted that his company’s $500 million was “a small contribution to the cause.”
Yes, that is interesting—and seemed to spark a trend. The top five of these contributors, last of which was Binance, comprise 69% of the total $7.1 billion, leaving the remaining 14 contributing substantially less at just $2.2 billion.
What this suggests is that success from Elon’s full court press to drum up billions from sorely needed investors appears to have dwindled rapidly, even among his biggest supporters. And he is has more than $20 billion to raise.
The only potentially good news about this for Elon, given his autocratic nature, is that none of the individual investments pledged so far come close to threatening what will be commanding ownership in Twitter for Elon ranging from his current 9.6% stake to potentially more than 75% if he comes up with the rest of the equity financing himself.
About that. Recall that the deal funding comprised a $12.5 billion in a margin loan to Elon backed by $62.5 billion of his Tesla stock—a 5-1 collateral to loan ratio and roughly a third of his stake—plus $13 billion in loans and bonds based on Twitter’s cash and assets, plus a $21 billion equity commitment from Elon to be materialized from somewhere at or just before the deal closes (see Twitter: Take the Money And Run).
The trouble is, as I and many others have discussed, Elon is already stretched to afford these terms, even without considering the extreme volatility of Tesla stock:
Musk has not said where he plans to find the $21 billion in equity, or risk capital, that he has promised to invest in the deal. He could sell some of his Tesla stock, as he did last week, generating $8.5 billion before taxes. Or he could take on some hedge funds or fellow billionaires as partners, who presumably would want some say in how the company is run. The balance he’ll have to borrow by pledging his Tesla stock as collateral.
There are several problems with this financing scenario. Musk had already pledged about half of his 173 million shares of Tesla stock to fund other ventures and activities. He has now pledged an additional 40 percent to secure the new loans to buy Twitter. That leaves only 10 percent of his Tesla shares available as collateral. Because Tesla’s policies allow major shareholders to borrow only 25 percent of the value of each share that is pledged, that would appear to limit further borrowing against his Tesla shares to less than $5 billion.
All that borrowing might work out just dandy as long as the value of the collateral — Tesla stock (TSLA) — remains at or near the $1,000 per share it was trading at when the deal was announced last week. Yet in the week since the announcement, it dropped 15 percent, to $870, at least in part out of fear that the stock could get caught up in Musk’s Twitter misadventure. Should it fall below $750, Musk could run afoul of Tesla’s own leverage ratio. And if it were to fall much below $600, the banks could demand that Musk pony up additional collateral, requiring him to quickly sell some of his shares.
Should Tesla stock fall below $400, the banks would probably demand immediate repayment, triggering a massive, forced sale of Tesla shares, depressing the share price even further and prompting other investors to bail out of the stock
Steven Pearlstein: The flawed math behind Elon Musk’s Twitter deal, 5/2/22
And this is why I anticipated Elon would be pushing hard to reduce his substantial personal financial risk in Twitter: Take the Money And Run):
Elon has substantial flexibility indicated and lots of time to haggle. I suspect his cash contribution via the margin loan will shrink over time, perhaps substantially, especially if I am right about Tesla’s troubled prospects this year and Tesla stock falls precipitously, which can’t be ruled out.
Today’s filing disclosed that Elon managed to get his margin loan commitment cut in half from $12.5 billion to now $6.25 billion.
This helps Elon with his tight margin availability, but the pressure’s not really reduced—just shifted, as I also expected. The $21 billion equity commitment was also increased by $6.5 billion to now $27.25 billion.
That means even with the $7.1 billion from friendly investors announced today, Elon still needs to come up with more than $20 billion before the deal closes.
That won’t happen until shareholders vote to accept the deal, which they probably will. Twitter hasn’t indicated when it will set the vote. It's possible everything could wrap up even before the next shareholders’ meeting on May 25th, but I doubt it.
For one thing, the U.S. Federal Trade Commission (FTC) is reviewing the transaction. As Bloomberg reported, the “FTC requires the buyer to notify the FTC and the Justice Department of the transaction and wait at least 30 days before closing to allow an investigation into potential antitrust concerns.”
The FTC already is investigating Musk’s significant delay in notifying regulators as required when he accumulated his Twitter stake with intentions to buy the company—a move that may have netted him a $156 million windfall since he was able to buy the stock at cheaper prices before he announced the news.
That said, I don’t expect the FTC to delay or block the transaction, nor do I expect anything more than a slap on the wrist for Elon related to his late filings.
I still expect Elon to stretch out as much time as he can to try muster up the remaining $20 billion he needs rather than selling down his fortune. If not from willing investors, which seem to be getting thinner into the weeds, then by adding to the debt package via additional unsecured bonds, increasing already untenable pro forma leverage Twitter can't afford (see Twitter: Take the Money And Run).
Either way, I’m sure Elon and Twitter would prefer to get the deal wrapped up before Twitter announces what could be disappointing second quarter results around July 26th.
Trading in Tesla’s existing bonds is mixed, reflecting considerable uncertainty still surrounding the deal as well as Twitter’s dicey prospects. Twitter’s existing $1.7 billion in senior notes are callable at 101% of par if the company is sold, but the new $1 billion issue of 5% notes due 2030 are trading above that level at 102.2 (4.7% ytw). The $700 million 3.875% notes due 2027 are still trading below par at 99 (4.1% ytw). Maintain “Underperform.”
Contact Us:
Disclaimer
This publication is prepared by Bond Angle LLC and is distributed solely to authorized recipients and clients of Bond Angle for their general use. In addition:
I/We have no position(s) in any of the securities referenced in this publication.
Views expressed in this publication accurately reflects my/our personal opinion(s) about the referenced securities and issuers and/or other subject matter as appropriate.
This publication does not contain and is not based on any non-public, material information.
To the best of my/our knowledge, the views expressed in this publication comply with applicable law in the country from which it is posted.
I/We have not been commissioned to write this publication or hold any specific opinion on the securities referenced therein.
Bond Angle does not do business with companies covered in its
publications, and nothing in this publication should be construed as a solicitation to buy or sell any security or product.Bond Angle accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this publication and/or further communication in relation to this document.