The purchase of Twitter by Elon Musk, estimated at around 41,000 million euros, has not yet been closed, but the richest person in the world is already paying the consequences.
Musk’s estimated fortune has fallen from 236.6 billion euros to 198 billion euros, or 16.3%, since his purchase offer was made public on April 14, according to the Bloomberg Billionaires Index. This is because Tesla shares have plunged 29% since the CEO launched his offer on Twitter, as most of his fortune consists of shares in the electric car maker.
It appears that Musk is backing down and has tweeted that the purchase is “on hold” unless Twitter can prove that less than 5% of its users are bots. And he has reportedly told a conference that revision of the deal “is not out of the question.”
He may be using the spam bot theme to buy Twitter at a lower price, as the stock price has fallen amid the wave of losses in tech stocks, or to ditch the deal altogether. Even if his deal tactic works, much of his Tesla stock would be tied up in a multibillion-dollar loan.
And if you decide to back out, Twitter could sue you to complete the deal or ask for billions in damages.
Musk has raised billions to reduce his personal financial risk, but it’s still tremendous
Musk has made some moves to reduce his exposure, but he would still have to pay hundreds of millions of debt servicing costs, as well as raise nearly $30 billion of his own funds.
On Musk’s behalf, Morgan Stanley arranged a $46.5 billion financing offer in less than a week to finance the purchase and refinance some of Twitter’s debt. Unveiled on April 21, the original deal included $25.5 billion worth of debt obligations, including $12.5 billion secured by his Tesla shares, and $21 billion in equity financing to be provided by Musk.
Wall Street’s Dirty Little Secret: Bankers Bet on Elon Musk, Not Twitter
Since then, Musk has reduced his personal exposure by raising another $7.1 billion from investors including billionaire Larry Ellison and a Saudi prince, reducing the collateral loan to $6.25 billion and increasing the equity portion to $27.25 billion. Even for the richest person in the world, the loan would affect a considerable part of his estate.
Under the terms of the commitment letter, Musk’s collateral must be equal to five times the value of the margin loan. To secure a €5.89bn loan, it would have to pledge €29.4bn in Tesla shares. Using Tesla’s stock price from last Wednesday, $709.81, he would have to put up 44 million shares, or just over a quarter of his 163 million shares.
The interest rate on the margin loan is 3% plus the highest of the three-month guaranteed overnight financing rates – a relatively new and volatile benchmark interest rate currently hovering around 0.29% – or zero.
Bloomberg has reported that Musk is looking for more outside investors so he can eliminate the margin loan, but this would mean an interest rate of up to 14%.
In addition, it still has to raise 19.8 billion euros in shares. He sold some 8.48 billion euros worth of Tesla shares at the end of April and could use that sum to cover about half. Without finding capital partners, he would have to ask for another loan. According to Tesla’s policy on insider trading, any loan has to be secured by shares worth at least four times as much.
If the deal goes through and Tesla shares continue to fall, Musk will have to ditch the shares, and his other assets are at stake.
This is how ELON MUSK lives and spends his money, the richest person in the world
–
If the shares secured by the margin loan fall by 40% from the time of the pledge, Musk has to pay cash to his lenders or sell those shares to fix the collateral shortfall.. According to Bloomberg, a margin call would occur if the shares fell to $420.
If you have given a personal guarantee, such as has reported Fortune, then you cannot put up other collateral, such as other shares, to prop up the loan. And if he can’t repay the loan by selling the collateralized shares, lenders could go to his other assets, such as his stake in his private aerospace company, SpaceX.
Elon Musk’s right-hand man: Jared Birchall, a former Morgan Stanley and Goldman Sachs banker with rock-solid loyalty to Tesla’s owner
Dumping the stock could cause its price to plummet further. Margin calls can hurt shareholders if the borrower decides – or is forced – to sell shares.
For example, in 2012, after shares in Green Mountain Coffee Roasters plummeted, company chairman Robert Stiller had to sell 5 million shares due to a margin call from Deutsche Bank. He was removed as chairman of the board of directors for selling shares during a blackout period.
Even if Musk pulls out of the deal, he would have to pay at least $1 billion.
Both parties are entitled to a termination fee of €1 billion within two business days if the other party backs out before October 24.
Musk could try to avoid paying the termination fee by arguing that Twitter misrepresented the number of fake accounts, but several lawyers have told Business Insider that this argument is unlikely to hold. He has said on several occasions that getting rid of the fake accounts was one of the reasons he bought Twitter, so claiming he was unaware is highly credible.
Twitter has indicated it would not be content with a termination fee, saying in a letter to shareholders that it is “committed to completing the transaction at the agreed price and terms as soon as possible.”
Twitter’s board of directors could be posing as Musk, explains lawyer Robert Heim to Business Insider. Agreeing to a lower sale price or settlement of damages would be more likely than following through with a larger lawsuit.
“You have to ask if this is a negotiating ploy by the board, because why would you want to sell the company to someone who doesn’t really want to buy it?” muses Heim, a partner at Tarter Krinsky & Drogin.
The contract limits damages to €1 billion, unless Twitter finds that Musk has committed “a knowing or intentional breach” of the contract. That number could be in the billions.although it would require a high burden of proof on Twitter’s part.
Musk, by making the deal public after the merger was signed, could draw the attention of the Securities and Exchange Commission. In 2018, he had to pay a fine of 37.7 million euros.
“He certainly has to be careful in terms of what he’s doing so he doesn’t get accused of manipulating Tesla’s stock price or Twitter,” Heim said.
–
