- Musk’s acquisition of Twitter is financed in part by a huge loan secured by his Tesla shares.
- He cut this loan in half with additional funds, but as Tesla shares fall, the deal looks more shaky.
- If Tesla shares drop below $420, Musk won’t have enough to cover the loan, Bloomberg reported.
If Tesla shares continue to fall, Elon Musk may not have enough money to buy Twitter.
Musk’s acquisition is based on a $12.5 billion loan secured by his Tesla shares. But the nosedive in tech stocks has put this crucial part of the deal in jeopardy. Tesla has plunged more than 20% to $769 since the loan deal was signed in April. If it falls below $420, Musk would not have enough uncommitted Tesla shares to cover the margin loan, Bloomberg calculated on Thursday.
This creates an apprehensive, though not inevitable, risk for Musk. It is raising an additional $7.1 billion from Sequoia Capital, Qatar, Oracle founder Larry Ellison and Saudi Prince Alwaleed bin Talal, reducing the margin loan to $6.25 billion. Without that, Musk would have already been out of collateral when Tesla dropped below $837, which he did last Friday.
The billionaire may also eliminate this margin loan altogether through another round of financing, though that route would likely come with punitive interest rates of up to 14%, according to Bloomberg. And there are already concerns about how Twitter, with its meager track record of profitability, could pay off such costly debt.
The market is betting that the deal will fail, or at least come at a much lower new price. On Friday, shares of Twitter closed at $40.72. That’s 25% off Musk’s $54.20 per share offer on April 25.
On Friday morning, Musk tweeted that the deal was “temporarily on hold” to check whether spam and fake Twitter accounts make up less than 5% of the company’s total users. A little over two hours later, he tweeted that he “was still committed to the acquisition.” However, this smacked of buyer’s remorse, or some sort of effort to renegotiate the purchase price, and caused a sudden 25% drop in Twitter stock.
The deal may still fall through, but the terms of the deal would make it costly for Musk. In addition to a $1 billion breaking fee, Twitter can sue you for damages and breach of contract and collect more than $1 billion, according to CNBC.
“While I look forward to the deal closing, we must be prepared for all scenarios and always do the right thing for Twitter,” Parag Agrawal, the company’s chief executive, wrote on Friday.
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