Tesla Stock Dropped After Elon Musk’s Deal for Twitter. Blame Margin Borrowing.

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Elon Musk is taking Twitter private.

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Twitter shares are rising and Tesla stock is down in response to news that the Twitter board of directors accepted Tesla CEO Elon Musk’s offer to buy the company for $54.20 a share.

Musk has secured financing for his purchase. It doesn’t look as if Musk will sell Tesla stock to finance the bid, but Tesla (ticker: TSLA) investors appear a little worried anyway.

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Twitter (TWTR) stock, which was briefly halted before news of the deal was disclosed, closed up about 5.7% at $51.70.

Tesla stock, however, dropped about $20, or 2%, shortly after Twitter announced it accepted Musk’s offer. Tesla shares finished down 0.7% at $998.02 a share. The S&P 500 and Dow Jones Industrial Average rose about 0.6% and 0.7%, respectively.

“Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated,” said Musk in a news release, “I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans.”

Tesla investors might believe that fixing Twitter is a big job that will take time away from Tesla. It could be a distraction. But another part of the news release might worry them as well.

“Mr. Musk has secured $25.5 billion of fully committed debt and margin loan financing and is providing an approximately $21.0 billion equity commitment,” reads the financing section of the news release.

Tesla investors might want to know exactly how much of the $25.5 billion in debt finance is margin debt associated with Musk’s Tesla stock. Musk is allowed to raise 25% of the value of his stock in debt.

A potential issue for Tesla investors could be margin calls. If Tesla stock drops to the point where the loan is greater than 25% of the value of Musk stock, he would have to pay back some of the margin loan, presumably by selling Tesla stock.

Tesla didn’t immediately respond to a request for comment about the amount of any margin loan Musk took to finance his Twitter bid.

Musk’s Tesla stock, and vested but unexercised stock options, are worth well north of $200 billion. Without options, and accounting for past loans, he probably has $40 billion in borrowing capacity.

That number implies the risk of a margin call is low. And if the 25% threshold looks far away, based on how much margin debt Musk is using, Tesla shares technical should be unaffected by any considerations from the Twitter bid.

The amount of stock used to back margin loans should be disclosed in coming filings with the Securities and Exchange Commission.

As for the $21 billion equity commitment, that can come from partners Musk brings into the deal as well as existing shareholders that want to stay invested in Twitter. And Musk already owns about 9% of Twitter stock. The equity portion shouldn’t necessitate Musk selling stock, either.

Still there is a little uncertainty. If Tesla investors can convince themselves Musk will leave his Tesla stock alone, they can solely focus on the problem that he will be distracted by his added job as Tweeter in Chief.

Write to Al Root at [email protected]


Credit: www.marketwatch.com /

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