Elon Musk is sitting on a loss in his
position. The loss is peanuts compared with what’s happened to his
stock. Despite all the red ink, the world’s richest human can still buy Twitter — if he still wants to.
Twitter (ticker: TWTR) closed a $35.76, down 5.5%, amid a broad market selloff catalyzed by weak revenue guidance from
fell 2.3%. Snap stock fell 43.1%. Tesla (TSLA) stock fell 6.9%, closing at $628.16.
The Twitter and Tesla stock decline on Tuesday didn’t seem to have had anything to do with Twitter’s potential purchase by Musk, but they hurt the Tesla CEO nonetheless. Musk’s original 73 million-plus share stake disclosed on April 4 cost him an average of about $36.16.
Twitter shares hadn’t closed below that since the stake was disclosed. Musk is down about 40 cents a share, or roughly $30 million, based on the early filings disclosing his stake.
That amount of money isn’t a big deal for Musk. The decline in Tesla stock matters much more. Since Musk’s initial stake in Twitter was disclosed, Tesla stock has dropped down about 45%. The drop in Tesla has cost the CEO about $87 billion in wealth. (The math is a little nuanced. Musk sold about 9.6 million shares in late April at higher prices to fund his Twitter purchase).
Musk’s remaining 163 million shares are worth about $102 billion. He plans to use stock to borrow about $6 billion to $7 billion against the value of his stock to finance part of his Twitter purchase. He is allowed to borrow up to 25% of the value of his Tesla stock, which gives him about $25 billion of borrowing capacity. Musk, however, probably doesn’t have the full $25 billion in margin lending available to him; he has borrowed against the value of his shares in the past.
Investors need to know how much money he has borrowed, or repaid, to get an accurate sense of Musk’s borrowing capacity. Tesla didn’t respond to a request for comment on the status of Musk’s prior margin loans.
Musk needs, very roughly, another $9 billion to purchase the 690 million-plus shares of Twitter he doesn’t own. Musk already has non-margin debt, cash from Tesla sales and billions from other equity partners.
He has other sources of cash, mainly SpaceX shares, vested Tesla stock options. He could also sell more Tesla stock and avoid the margin loan, but Tesla shareholders won’t like seeing more large blocks of Tesla stock sold.
What’s more, the $9 billion figure presumes Musk pays the original price of $54.20 a share. That is far from certain. Musk is going back and forth with Twitter management over the number of spam tweets, which Musk says is a material factor when evaluating what Twitter is worth. Twitter said it is about 5% of daily active usage. Musk believes it is much higher.
The market seems to believe no deal or a deal at a lower price is the most likely outcome of the back and forth. Twitter stock is $18.44 below Musk’s bid. That implies gains of 52% for someone buying Twitter now. Said the other way, it is 34% below the bid price.
The market isn’t waiting for that gain to be realized. It is waiting for another shoe to drop.
Write to Al Root at firstname.lastname@example.org