Elon Musk drops margin loan from Twitter show, making it less risky
HLon Musk has ditched one of the more risky components behind his $44 billion bid to buy Twitter, a move you can read as a smart move given the one direction the markets have moved over the past few weeks: Down, down, down.
Musk has canceled a plan to take out a marginal loan as part of his acquisition funding for $54.20 per share, according to a new Securities and Exchange Commission filing. Originally, he intended to use such a $12.5 billion loan, but several weeks ago, he cut the figure in half after attracting additional investors to the deal. Now, he says he will earn $6.25 billion in additional equity. This does not affect the other $13 billion in record corporate debt involved in the deal.
If Musk had taken out the margin loan, he would have needed to secure it with his Tesla stock. Under the terms of the loan, Musk needed to float Tesla stock worth $31.25 billion. With the stock price dropping, he was in a position to need more Tesla shares to cover the loan. Margin loans are a gamble at the best of times. But even more so during a period of financial distress, such as the period We currently find ourselves in.
If things went wrong, there was an external possibility that the holder could face a so-called margin call, when the equity that secures the margin loan goes bad and the lender forces the loan to repay. Had this happened, Musk would have needed to sell Tesla shares in a pell-mell fashion, further driving the stock price down. (More dramatic margin calls lead to dramatic ends, spirals that completely consumed businesses and ran past. This recently happened to Archegos Capital Management. It might not have happened to Tesla, but it surely would have made something bad worse.) Lender Musk, Morgan Stanley, threshold a 40% drop in Tesla stock to launch such an event. And with Tesla stock already down nearly 25% in the past month, you’ll feel Musk’s circumstances: they’ve changed significantly since he first spoke about the Twitter acquisition in April, that is.
As with everything about Musk and Twitter, there are some complications to this turn of events. Above all, where will he get his $6.5 billion in equity from to replace his margin loan?
He will need to do one of two things. Likely he will sell more Tesla shares, not a great scenario in a bear market. Doing so will further reduce Tesla’s inventory. Or he will need to find more friends to join his fun band, and that wouldn’t be a great scenario either. If it was hard to convince investors a month ago before stocks started to slide — and because of the dearth of traditional, high-profile names on the bargain table, it sure looks like it was — it will be hard to convince people of that now. In bear markets, investors are fleeing companies like Twitter, little profitable companies and forever a bit of trading disappointment. They don’t tend to run towards them. Twitter shares closed Thursday at $37.16, well below Musk’s bid of $54.20.
not only this! Imagine going out on a fundraiser now to buy a company you’ve spent the past few weeks accusing of mismanaging basics like spam discretion. It’s as if Musk is looking for someone to share a house installed upstairs with after standing in the street and yelling about how the place has rats and bad wires. (But don’t worry, I know a good exterminator, Presumably he will need to tell any new participating investor. This home will be great after you’re done with it. And they are justified that they may look at it somewhat funny.)
And here’s the other thing: Didn’t Mask say the whole thing about these random numbers? In a sense, you could view his decision on a margin loan as a signal that he’s not pending, and expect Musk to follow through. Why would a margin loan drop and the SEC would file if it didn’t? Ah ha. It looks like it might take the place after all even if it has pests on it.