Business: Musk and Twitter, again

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Last month, Elon Musk committed to fund his $46.5 billion purchase of Twitter Inc. with the following sources of money:

  • $13 billion of traditional leveraged finance debt, borrowed by Twitter at closing.
  • $12.5 billion of margin loans, borrowed by Musk personally, secured by his Tesla Inc. stock, at a 20% loan-to-value ratio. So he had to put up $62.5 billion of Tesla stock to secure this $12.5 billion loan. 
  • $21 billion of equity, that is, his own money. He probably did not have $21 billion of cash, so this portion basically meant that he would sell some Tesla stock and use the proceeds to pay for Twitter. And he then  sold about $8.5 billion of Tesla stock, presumably to raise money to fund part of the equity commitment. “No further TSLA sales planned after today,” he tweeted at the time. He also sold some Tesla stock last year, and his finances are not entirely transparent; I suppose it’s possible that he now has the $21 billion in a checking account.

Earlier this month, he announced a change in the financing:

  • $13 billion of LBO debt, same as before. This was always an aggressive amount of debt for Musk’s banks to lend to Twitter — something like 8 times expected 2022 earnings before interest, taxes, depreciation and amortization — and, having gotten them to commit, he’s not going to let that go.
  • Only $6.25 billion of margin loans, half the original amount. At a 20% LTV that would require him to post $31.25 billion of Tesla stock.
  • $27.25 billion of equity. The equity would not be all his own money: He had commitments from other investors to either chip in money or else to roll their existing Twitter shares into Musk Twitter, totaling about $7.1 billion. But he signed an equity commitment letter for the $27.25 billion: If for some reason those other people flake, he still has to put up the money; as far as Twitter is concerned he’s on the hook for the whole $27.25 billion.

So basically he replaced half the margin loan with money from other equity investors. He still had to pitch in about $20 billion of his own money, that is, proceeds from selling Tesla stock.

Yesterday he announced another change in the financing:

  • Still that $13 billion of good LBO debt.
  • Never mind the margin loan; it is gone now.
  • $33.5 billion of equity. The entire margin loan has been replaced by an equity commitment.

Both last time and this time, Musk said that he is continuing to talk to potential equity co-investors, either to commit more money or to roll their existing Twitter stakes into Musk Twitter. (In particular he continues to mention that he’s trying to get Twitter founder Jack Dorsey to roll his shares.) So at least $7.1 billion, and possibly $10 billion or $15 billion or more, of that $33.5 billion will come from someone other than Musk. But if he can’t raise any more equity, he’ll have to come up with the $26.4 billion that he hasn’t already syndicated.

Why would he scrap the margin loan? Well, it’s important to point out that I don’t know anything. But I can do some simple arithmetic:

  • If he gets $6.25 billion of margin loan at a 20% LTV, he will need to pledge $31.25 billion of Tesla stock to get the margin loan.
  • If he replaces that with $6.25 billion of equity, he could sell $8.2 billion of Tesla stock to raise that money. The top effective federal capital gains tax rate is 23.8%, and the top Texas capital gains tax rate is zero, so if he sells $8.2 billion of stock that will generate about $6.25 billion of after-tax proceeds.
  • $8.2 billion is less than $31.25 billion.

Tesla’s stock has gone down a lot since the initial announcement of the deal. Musk owns about 163 million Tesla shares, of which about 92.3 million are pledged to secure other loans, leaving him about 70.6 million free shares. When Musk first got his margin loan commitment on April 20, those shares were worth about $69 billion, more than enough to cover a $12.5 billion margin loan at a 20% loan-to-value ratio. As of Tuesday’s close, they were worth about $44.4 billion, which would support about an $8.9 billion margin loan. That’s cutting it a little close. To get the $6.25 billion margin loan at the current low-to-mid-$600s Tesla stock prices, Musk would have to pledge most of his remaining shares.

A margin loan is a way to turn stock into cash at a 20% efficiency rate: Musk can pledge $5 of stock to get $1 of margin loan. But just selling the stock turns it into cash at about a 76.2% efficiency rate: He can sell $1 of stock to get back $0.76 of cash (after taxes). Of course if he sells a huge chunk of stock that will drive down the price, but still. If Musk sold all of his remaining unpledged Tesla shares at $500 per share — way below current prices — he’d raise about $35 billion, or call it $27 billion after tax, far more than he needs. Whereas pledging all those shares for a margin loan, even at a $650 stock price, would only raise about $9 billion. 

Basically the point here is that Musk has more than enough Tesla stock to sell to pay for Twitter, but only barely enough to borrow against to pay for Twitter. So he has abandoned his initial plans to borrow against his Tesla stock, presumably — who knows? — to give him more flexibility to sell it.

Or, of course, he could sell more of the equity to co-investors, as he is still trying to do. Again, I know nothing, and for a while there was an active business of people trying to raise weird funds to buy stakes in Musk Twitter. But that business — of syndicating the equity of the deal — seems to have gone quiet recently, probably because on May 13 Musk tweeted that the deal is “on hold,” which does seem like it would make it harder to raise money.

Now. As I said at the time, and as Twitter later told employees, there is no such thing as “on hold.” The process kept moving forward, as you can tell because a few days later Twitter filed a merger proxy, signed off on by Musk, to get shareholder approval. And now Musk has signed an updated commitment letter promising to commit even more of his own money to the deal. The deal was never “on hold,” and Musk’s tweeting does not seem to have interrupted the bankers’ and lawyers’ and his own efforts to get the deal closed.

When Musk tweeted about the deal being “temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” 

What is going on here? My initial reaction was that Musk was joking, that this was just a way to troll people online. It is, after all, Friday the 13th. “Still committed to acquisition,” he tweeted two hours later. Obviously this would be a bad joke, insofar as it “sent Twitter stock tumbling as much as 25% in premarket trading.” You are not supposed to say things that aren’t true and that will affect the stock of a public company that you are trying to buy. That is what is usually called “securities fraud,” or what I sometimes like to call “lite securities fraud.” Musk has a long history of lite securities fraud: He used to make jokes about Tesla Inc. introducing new products or going bankrupt, and he notably settled a fraud lawsuit with the U.S. Securities and Exchange Commission because he tweeted that he had secured funding to take Tesla private but had not. If he just woke up feeling frisky and tweeted a joke about Twitter’s bot accounts, a joke that wiped billions of dollars off Twitter’s market capitalization, that would be totally unsurprising. Bad! Not really allowed! But very much in character.

But then I moved on from that initial reaction. And I, and a lot of people, spent like a week wondering Will Musk Try To Get Out of the Deal, and Will He Get Away With It, and What Does the Delaware Caselaw on Specific Performance Look Like, and Could the Number of Bots on Twitter Represent a Material Adverse Effect, and Will Twitter’s Board Renegotiate a Lower Price To Avoid Drawn-Out Litigation With Elon Musk, and other stuff that in hindsight was stupid. He really was kidding! He tweeted about the bot thing for a couple of days to troll people, and then he dropped it and continued working diligently to make sure the deal will close.

And now he has made that closing a bit more certain by replacing the margin loan with a cash equity commitment, effectively promising that even if Tesla’s stock falls further he will still be there with the money to buy Twitter. Because he wants to buy Twitter! But he also wants to troll people on Twitter.

This is very dumb and you really should not troll people about your plans to buy a $40 billion public company. But Musk does, and here we are.