Twitter Stocks Edges Lower as Doubts About Musk’s Financing Persist
2022.04.27 15:55
By Geoffrey Smith
Investing.com — Twitter stock edged another 1% lower in premarket on Wednesday as market participants cast doubt on the chances of Elon Musk’s deal executing as planned.
By 8:25 AM ET (1225 GMT), Twitter (NYSE:TWTR) stock was at $49.21, more than 10% below the $54.20 price that Twitter’s board agreed with Musk on Monday.
Doubts about the deal are two-fold. On the one hand, left-leaning lawmakers in Washington have expressed hostility toward the merger and may put pressure on regulators to block the deal.
On the other, the amount of debt involved in the transaction has sparked concerns about Musk’s ability to pay for the deal.
Musk is only contributing half the purchase price with his own money. The rest of the funds are coming from a $6.5 billion term loan, $6 billion in bridge loans, half of which is secured, a $500m revolving facility and, most importantly, a $12.5 billion margin loan secured against Musk’s Tesla (NASDAQ:TSLA) shares.
Margin loans are designed to be liquidated if the value of the collateral pledged falls below a certain level. Initial assessments of the deal had concluded that Tesla’s stock price would have to drop over 40% to trigger a margin call from Musk, a seemingly unlikely outcome.
However, Tesla’s own rules, as disclosed in its 2021 proxy statement, appears to enforce a much tighter rule, saying that the loan must not exceed 25% of the pledged stock at the time the deal closes. As such, according to some analysts, Tesla stock would only need to fall 20% from the closing level to trigger the margin call. Given that the bulk of Musk’s fortune is tied up in Tesla stock, that could only be met by a forced liquidation of at least some Tesla stock.
Tesla stock is arguably highly vulnerable to such a selloff, having routinely traded at price multiples way above what classical portfolio theory would suggest are sustainable. Even after Tuesday’s 12% drop, which was in part a reaction to the risk of Musk facing a margin call, the stock still trades at over 14 times 2021 sales and 118 times trailing earnings.
