- Elon Musk is already feeling the pain from his acquisition of Twitter due to Tesla’s stock slump.
- If he backs out, he has to pay $1 billion to Twitter, and the company could sue for billions more.
- Here’s what could happen to Musk’s billions whether he goes through with the deal or not.
Elon Musk’s $44 billion acquisition of Twitter has yet to go through, but the world’s richest person is already feeling the hurt.
Musk’s net worth has dropped from $251 billion to $210 billion, or 16.3%, since his offer became public on April 14, according to the Bloomberg Billionaires Index. This is due to Tesla stock slumping 29% since the CEO launched his Twitter bid as most of his fortune consists of the electric carmaker’s shares.
Musk appears to be getting cold feet, tweeting that the acquisition is “on hold” unless Twitter can prove fewer than 5% of its users are bots and reportedly saying at a conference that repricing the deal is “not out of the question.”
He could be using the issue of spam bots to buy Twitter at a lower price as the stock price has fallen amid the tech sell-off or to ditch the deal altogether. Even if his negotiation tactic works, much of his Tesla stock would be tied up in a multibillion-dollar margin loan. And if he decides to back out, Twitter could sue him to complete the deal or 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 will still have to pay debt servicing costs in the hundreds of millions on the margin loan as well as coming up with nearly $30 billion in equity financing.
On Musk's behalf, Morgan Stanley arranged $46.5 billion in financing to fund the purchase and refinance some of Twitter's debt in less than a week. Unveiled on April 21, the original arrangement comprised $25.5 billion worth of debt commitments, including $12.5 billion secured against his Tesla stock, and $21 billion in equity financing to be provided by Musk.
He has since reduced his personal exposure by raising another $7.1 billion from investors including billionaire Larry Ellison and a Saudi prince, cutting the margin loan to $6.25 billion and raising the equity portion to $27.25 billion. Even for the world's richest person, the loan would impact a considerable portion of his net worth.
Under the terms of the commitment letter, Musk's collateral must equal five times the value of the margin loan. To secure a $6.25 billion loan, he would have to pledge $31.25 billion worth of Tesla shares. Using Tesla's stock price as of May 18 of $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 higher of the 3-month term secured overnight financing rate (currently around 0.29%) and zero. SOFR is a relatively new benchmark interest rate and volatile.
Musk is looking for more outside investors so he can scrap the margin loan altogether, but this comes with an interest rate as high as 14%, according to Bloomberg.
He is also still on the hook for raising $21 billion in equity. He sold about $9 billion worth of Tesla shares in late April, and could use that sum to cover about half. Without finding equity partners, he would have to take another loan. Under Tesla's insider trading policy, any loans have to be collateralized by shares worth at least four times as much.
If the deal goes through and Tesla stock continues to fall, Musk would have to dump shares and his other assets are on the line
If the collateralized shares for the margin loan fall by 40% from the time of the pledge, Musk has to pay cash to his lenders or sell those shares in order to fix the collateral shortfall. According to Bloomberg, a margin call would kick in if the shares dropped to $420.
If he has provided a personal guarantee as Fortune has reported, then he can't put up other collateral such as other shares in order to shore up the loan. And if he can't repay the loan by selling the collateralized shares, lenders could come for his other assets, such as his equity in his privately held aerospace company SpaceX.
Dumping shares could cause the stock price to plummet further. Margin calls can hurt shareholders if the borrower chooses to – or is forced to – sell shares. For instance, in 2012, after shares of Green Mountain Coffee Roasters nose-dived, the company's chairman, Robert Stiller, had to sell 5 million shares because of a margin call from Deutsche Bank. He was removed as board chairman for selling shares during a blackout period.
Even if Musk backs out of the deal, he is on the hook for at least $1 billion
Both sides are entitled to a $1 billion termination fee within two business days if the other party backs out before October 24, 2022.
Musk could try to get out of paying the termination fee by arguing that Twitter misrepresented its number of fake accounts, but multiple attorneys told Insider that this argument is unlikely to hold water. He has stated multiple times that getting rid of fake accounts was a reason for buying Twitter, so claiming he was unaware of the issue stretches credulity.
Twitter has indicated it would not be content with a termination fee, stating in a letter to shareholders that it is "committed to completing the transaction on the agreed price and terms as promptly as practicable."
Twitter's board might be posturing like Musk is, lawyer Robert Heim told Insider. Agreeing on a lower sales price or a settlement on damages would be more likely than following through on a bigger lawsuit.
"You have to wonder if this is a negotiating tactic by the board because why would you want to sell the company to someone who doesn't actually want to purchase it?" said Heim, partner at Tarter Krinsky & Drogin.
The contract caps damages at $1 billion, unless Twitter finds that Musk has committed "a knowing or intentional breach" of the contract. That figure could be in the billions, though it would require a high burden of proof from Twitter's side.
Musk publicly hemming and hawing about the deal after signing the merger agreement could draw the attention of the SEC. In 2018, he had to pay a $40 million fine after his tweets about taking Tesla private.
"He certainly has to be careful in terms of what he's doing so he's not accused of manipulating the price of Tesla or Twitter stock," Heim said.