Tesla (TSLA) – Get Tesla Inc Report investors and fans may be able to breathe a bit more easily.
Since Elon Musk’s April 14 announcement of a $44 billion bid for social network Twitter, (TWTR) – Get Twitter, Inc. Report they’ve seen the price of Tesla shares wobble.
In addition to concern about Musk focusing less on the manufacturer of high-end electric vehicles, they also worry about the prospect of his financial withdrawal from Tesla.
Indeed, to fund the Twitter transaction, the billionaire, whose assets are largely illiquid, obtained loans including a margin loan of $12.5 billion linked to his Tesla shares.
This margin loan has pressured Tesla shares; they’ve lost almost 29% of their value since the Twitter deal was announced. That’s because investors wonder whether Musk might sell more Tesla stock than the $8.5 billion he’s already sold to finance Twitter.
Musk sits at the center of Tesla. He is the vision, the products, the marketing manager, the sales manager, the senior public-relations executive. Tesla’s meteoric stock market rise is underpinned by two things: its cars and the serial entrepreneur’s efforts.
If Musk were to become less involved in Tesla, it’s hard to see how investors will maintain absolute faith in the Austin company.
Musk Wants to Erase the Margin Loan
The tech tycoon is taking initiatives to reassure investors and fans.
He has already pared the margin loan after having obtained $7.1 billion in preferred-equity commitments from a group of investors including Oracle (ORCL) – Get Oracle Corporation Report Founder Larry Ellison, Sequoia Capital, Qatar Holding and Saudi Prince Al Waleed bin Talal Al Saud, a current Twitter shareholder.
Since that announcement, Musk has also secured another $1 billion equity commitment, two sources told TheStreet on condition of anonymity.
The billionaire and his advisers are currently in discussions to obtain other equity commitments, which together with the preferred financing would make it possible to curb the margin loan and thereby eliminate any financial risk for Musk and his lenders.
The preferred equity may have a 20-year maturity and include a feature allowing interest to be paid in kind at a rate of 14%, Bloomberg reported.
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That interest rate would be increased by 0.75 percentage point in the seventh, eight and ninth years. It could also be structured with a 10% interest rate and warrant, Bloomberg said, citing people close to the matter.
A representative for Musk didn’t return a request for comment.
Given the Tesla shares that Musk holds to back his ability to borrow money, the price of Tesla shares would have to stay at $837 or above to cover a $12.5 billion margin loan. But with a $6.25 billion margin loan, Musk has flexibility: Tesla shares could go as low as $420 and he’d still be able to manage the debt. Tesla stock closed May 12 at $728.
The Acquisition of Twitter Is on Hold
Meantime, some fresh concerns about the Twitter deal have arisen. Musk said on May 13 that his offer was on hold.
“Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” Musk told his almost 93 million followers.
The statement follows a May 2 Reuters article that said that Twitter had 229 million users who viewed consistent ads. The news service added that less than 5% of its so-called monetizable daily active users were false or spam accounts.
The figures come from Twitter’s Securities and Exchange Commission Form 10-Q, filed May 2.
Some industry sources say Musk could use these numbers to either renegotiate the price of the acquisition or simply drop it altogether.
“Still committed to acquisition,” Musk said several minutes after his first tweet saying the deal was on hold.
While waiting for the billionaire’s final decision, comments to his post were unsurprisingly split between his detractors and his fans.
“It looks like I was right all along,” the economist Peter Schiff commented. “You never actually intended to buy #Twitter. You were bluffing the entire time. How many Twitter shares did you sell before tweeting this announcement?”
“If he was bluffing, we can only applaud,” another Twitter user said. “If he’s negotiating, we should learn from him. Either way, @elonmusk is a genius.”
“Due diligence is always worthwhile 👍,” another user added.