The Japan Times
Why Musk’s Twitter bid has shaken Tesla investors
Shareholders are about to learn what happens when a CEO becomes overseer of an internet battleground
Elon Musk’s deal for Twitter has features that make it risky, including billions of dollars of personal debt. If it goes wrong, it could burn Tesla shareholders and strain Twitter’s financial health.
There are already signs of investor concern. As Tesla has become one of the world’s most valuable companies, its stock has become widely owned by retail investors through mutual funds and other investment vehicles. But it has fallen 24% since the disclosure early last month that Musk had taken a sizable stake in Twitter, a period in which the S&P 500 has declined 10%.
“Even if he’s able to finance it, it just is not a sensible deal from a financial perspective,” said Aswath Damodaran, professor of finance at New York University’s Stern School of Business.
Musk has demonstrated that he can build two large, successful companies at once: After some stumbles, Tesla sells far more electric vehicles than any competitor, and SpaceX is a leading rocket company. And he may be able to make Twitter more popular and profitable.
But Tesla shareholders are about to find out what happens when a CEO becomes, along with his other duties, overseer of an internet battleground.
Tesla’s shares are part of the deal
Even though Musk and his partners are investing over $20 billion in cash to buy Twitter, he also intends to raise money by taking out a $6.25 billion loan backed with Tesla stock, down from $12.5 billion in an earlier outline of the deal’s financing.
Analysts said it was hard to think of another deal in which an individual incurred such a large debt against shares — known as a margin loan — to help pay for another company.
The terms of the loan may change, but those disclosed early in the process show that the lenders thought it was a potentially risky part of the deal. A filing indicated that the banks were demanding that Musk back the loan with Tesla stock worth five times as much as the value of the loan, giving them plenty of cushion. The loan also had a 0.5% upfront fee and an interest rate of over 3%. Vicki Bryan, CEO of Bond Angle, a research firm, said the terms were “very stiff.”
The banks may be wary because they have already lent to Musk. A filing Monday revealed that by the end of last year, before mounting his Twitter bid, Musk had pledged over 92 million shares to secure personal loans, though the filing did not say how much he had borrowed, if anything.
Musk did not respond to a request for comment for this article.
The margin loan could go wrong
The margin loan to buy Twitter could become a destabilizing force if Tesla’s stock value were to plunge. A steep decline might prompt the banks to sell their stock collateral to recoup the money they lent Musk, which could in turn set off even more selling across the market. The terms of Musk’s margin loan stated that he must pay off the entire debt if Tesla stock falls more than 40% from its price on the day of the loan.
Tesla’s business is doing well, so analysts do not expect its stock to collapse. During the first three months of 2022, 75% of the electric cars sold in the United States were Teslas, according to data from Cox Automotive.
Recently, traditional carmakers like Ford, Hyundai and Kia have been selling appealing electric vehicles, and most analysts expect Tesla’s share of the market to drop. But that has not happened yet. On the contrary, Tesla’s market share in the first quarter was even bigger than it was a year earlier, when it had 70% of domestic EV sales.
“Nobody is going to have 100% of market share forever,” said Michelle Krebs, an executive analyst at Cox. “They will have competition. On the other hand, every time we have said that, no one has really challenged them.”
But some analysts see weaknesses in Tesla’s business, including a lack of new products and persistent quality problems, and they say the margin loan adds to the forces that could weigh on Tesla’s stock.
“Now he’s added another layer of risk because he’s pledging more stock,” Bryan said.
Twitter could become a distraction
Twitter could distract Musk from running the car company and his other businesses. That risk is especially acute if managing the platform becomes a headache and leads to controversies that are distracting or alienate potential Tesla customers.
Some shareholders say Musk’s off-the-cuff posts on Twitter — he once drew comparisons between Justin Trudeau, the prime minister of Canada, and Hitler — have already damaged Tesla.
“The guy has said so many controversial things,” said Kristin Hull, founder and CEO of Nia Impact Capital, a fund in Oakland, California, that invests in companies with a positive social impact. “Are they distractions? Are they confusing? Has he interfered with the stock value through his tweets? Absolutely.”
With Musk becoming Twitter’s owner, “it only gets bigger,” Hull said. Nia recently sold most of its shares in Tesla, she said, because the fund was dissatisfied with the company’s response to accusations of racism at its factory in Fremont, California.
Musk’s ownership of Twitter could alienate some potential Tesla buyers. Among people considering buying an electric car, Democrats outnumber Republicans by almost 2-1, according to Morning Consult, a research firm.
But Democrats are also the group most likely to be put off if Musk, in the name of free speech, opens Twitter to extremist views or misinformation.
The Twitter acquisition could intensify scrutiny of Musk by stock market regulators. He has been sued by a Twitter shareholder who accuses him of missing the regulatory deadline to report that he had amassed a 5% stake in the platform.
The lawsuit, filed by Block & Leviton, a Boston law firm, claims Musk saved himself tens of millions of dollars by waiting six days past the deadline to disclose his stake. He was able to continue buying Twitter shares more cheaply than would have been possible if his interest was public knowledge, the suit claims.
Musk has a long history of antagonism with the Securities and Exchange Commission. Last month he failed to convince a New York judge to release him from a 2018 agreement with the SEC that requires him to have a company attorney screen his social media posts if the statements could move Tesla’s share price.
By buying Twitter, “you’re putting yourself in the face of the SEC,” said Chester Spatt, a professor of finance at the Tepper School of Business at Carnegie Mellon University. “It’s easy to imagine the SEC saying, ‘This guy is a serial offender. What else do we need to do?’”
Tesla shares have fallen 24% since the disclosure early last month that Musk had taken a sizable stake in Twitter.
The deal could turn into a money pit
Musk may be able to turn Twitter around, but if he doesn’t, the company may struggle to repay the $13 billion of new borrowing that the company is expected to take on, according to the deal plans.
If Twitter’s finances became dire and it struggled to pay the new debt, Musk and any other owners of the company would have to decide whether to provide more financial support. He might be able to borrow more against his Tesla shares, sell some of them, or even borrow against other valuable assets, like his stake in SpaceX, which could be worth over $40 billion.
“Categorically, there is no way the company can carry that debt,” Damodaran said, referring to Twitter.
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