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Tesla stock down over 9% in early trade after Musk seals Twitter deal

The drop in Tesla's shares suggests that the company's investors are concerned about the financing of the deal to acquire Twitter.

April 26, 2022 / 09:52 PM IST
Logo of electric vehicle manufacturer Tesla, which is headed by Elon Musk (Image: Reuters)

Logo of electric vehicle manufacturer Tesla, which is headed by Elon Musk (Image: Reuters)


Tesla Inc's stock dropped by over nine percent during early trading hours on April 26, in what was seen as an adverse impact of the finalisation of deal between company's CEO Elon Musk and Twitter Inc for the latter's acquisition.

The electric car-maker's shares were trading at $905.95 a piece at Nasdaq at the time of writing this report, which was around 9.2 percent or nearly $92 lower as compared to the previous day's close.

The slide comes a day after Twitter announced that it has entered into definite agreement with Musk to sell the microblogging site for $44 billion or $54.20 per share.

The timing of the dip in Tesla's shares suggests that the company's investors are concerned about the Twitter deal. Their apprehensions are linked to the acquisition's financing, as Musk would be raising $12.5 billion in loans against his Tesla stock.

For the remaining amount, banks are offering $13 billion in debt financing and Musk has pledged to equity finance $21 billion himself.

The banks backing Musk's bid balked at providing more debt secured against Twitter, arguing that the San Francisco-based company did not produce enough cash flow to justify it, people familiar with the matter had told Reuters ahead of the deal. Some banks were also worried that financial regulators could reprimand them if they took on more risk, the sources had added.

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This will have an impact on Musk's returns, since debt secured against an acquired company can greatly amplify profits.

To double the $33.5 billion Musk is contributing out of his own fortune to the buyout, Twitter's value would have to go up by 1.4 times. Had he put in only a third of the deal consideration as equity, Twitter's value would have to go up by only 0.7 times for that money to double.


What is more, Musk has agreed to take out a risky $12.5 billion margin loan, secured against his stock of Tesla to pay for some of the $33.5 billion equity check. Were Tesla's stock to drop by 40 percent, he would have to repay that loan, a regulatory filing shows.


Musk said last week that he did not care about the economics of the deal "at all" and that he was pursuing the acquisition because it was "extremely important to the future of civilization."


Musk is the world's richest person, with a net worth pegged by Forbes at $270 billion. Yet most of his wealth is tied up in Tesla shares, and the proposed deal structure would dry up most of his available liquidity.


He had already borrowed against $88 billion worth of Tesla stock, and the proposed acquisition financing for Twitter would push that figure to more than $150 billion, regulatory filings show. This would leave him little runway to get more cash out of his Tesla shares in the short term, since Tesla executives may borrow no more than 25 percent of the value of their pledged stock.


Musk's loan against his Tesla stock to finance his Twitter bid is also expensive, potentially costing him about $1 billion annually in interest and amortization expenses, a regulatory filing shows. That gives him an incentive to refinance the proposed debt package at the earliest opportunity.


It is not clear how much of the $21 billion in cash that Musk has committed to the deal is immediately available to him, and whether he would have to cash out on some of his assets. They include stakes in rocket maker SpaceX and tunneling startup Boring Co.

(With inputs from Reuters)



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Moneycontrol News
first published: Apr 26, 2022 09:52 pm
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