Loan expansion, Musk's gain and Tesla's confusion

Written by / Zhang Ou

Editor/ Cow Heel Shang

Design / Zhao Haoran

来源/ The New York Times，作者：Peter Eavis and Jack Ewing

Yes, or Musk's $44 billion Twitter deal.

The deal has not yet been funded, and the high amount of personal debt in it has become one of the triggers that have alarmed Tesla shareholders. Once there is a problem, Tesla is very likely to be affected, and Twitter's financial health will also be affected.

As Tesla becomes one of the most valuable companies in the world, its stock has been widely held by retail investors through mutual funds and other investment vehicles. But Tesla's stock price has fallen 24 percent since it was revealed in early April that Musk holds a large stake in Twitter, and the S&P 500 has also fallen 10 percent during that period.

Aswath Damodaran, a professor of finance at NYU's Stern School of Business, said: "Even if he successfully raises funds, it is not a reasonable deal from a financial point of view. ”

Musk has proven that he can build and run two successful businesses at the same time. After some setbacks, Tesla's central position in the electric car market can not be shaken in the short term, and SpaceX has also become a leading rocket company. So he does make Twitter more popular, more active, and more profitable.

But as the world's richest man began to borrow money to expand his business empire, Tesla was really a little panicked.

Twitter's new boss, Elon Musk

Tesla shares that are included in the deal

Musk said in a Filing Filed May 5 that he has secured about $7.1 billion in new financing commitments from outside investors for the proposed $44 billion.

The main investors include 19 independent investors/investors, including Oracle founder Larry Ellison and Saudi Prince Al-Waleed bin Talal, who previously opposed his acquisition of Twitter.

He is in discussions with Twitter co-founder Jack Dorsey about using some of his stake for the acquisition. The company also said the total principal amount of margin loans previously announced for trading fell from $12.5 billion to $6.25 billion.

The margin loan was backed by his mortgaged tens of billions of dollars worth of Tesla stock. It's unclear how much of the money will come from selling some of his Tesla shares, but he has sold more than $8.5 billion in Tesla stock to finance the deal.

Industry analysts say it's hard to imagine a transaction in which an individual generates such a large debt (margin loan) collateralized by stock to help pay for another company.

Loan terms may change, but according to earlier disclosed terms, banks ask Musk to back up the loan with 5 times the value of the loan with Tesla stock, which also has an upfront fee of 0.5 percent and an interest rate of more than 3 percent.

Vicki Bryan, CEO of research firm Bond Angle, commented on the terms as "extremely harsh."

Banks would be even more reasonable because they had already lent Musk before. By the end of 2021, Musk had mortgaged more than 92 million shares to obtain personal loans before launching the Twitter bid. The document did not indicate how much money he borrowed.

Before the dust settled on the acquisition, Musk announced that he had secured a $46.5 billion financing plan (Source: Reuters Graphics).▼

If tesla's stock value plummets, buying a margin loan from Twitter could become a destabilizing factor. A sharp drop would prompt banks to sell stock collateral to recoup the money they lent Musk, which in turn could trigger more sell-offs across the market.

Musk's margin loan terms stipulate that if Tesla stock falls more than 40 percent from the price on the day of the loan, he must pay off all of his debt.

However, according to Cox Motor Company, in the first three months of 2022, 75% of the electric vehicles sold in the United States were Tesla, and the market share even increased from 70% in the previous year in the face of increasing competition.

Business development is so buoyant that the probability of a stock crash is almost negligible.

But some analysts see weaknesses in Tesla's business, including a lack of new products and ongoing quality issues. Margin loans have also invisibly increased the pressure on Tesla stock.

He mortgaged more stocks, which also meant another layer of increased risk.

Twitter's growing presence

Twitter could distract Musk from running a car company and other businesses.

This risk is exacerbated if managing the platform becomes a headache and leads to controversies that distract or alienate Potential Tesla customers.

Some shareholders have complained that Musk's remarks on Twitter often have the potential to damage Tesla's image. He once compared Canadian Prime Minister Justin Trudeau to Hitler.

The unabashed tweets have earned Musk and his business empire enough eyeballs, and in a way, that's a good thing. But it does interfere with the value of the stock. And as he becomes the owner of Twitter, that's only going to continue.

Twitter's San Francisco headquarters (Jim Wilson/The New York Times)."

Stock market regulators' scrutiny of Musk will also intensify.

He has been sued by a Twitter shareholder accusing him of failing to report the fact that he amassed a 5 percent stake in the social platform within the deadlines set by regulation.

The lawsuit filed by Boston law firm Block & Leviton says Musk saved himself tens of millions of dollars by disclosing his shares six days after the reporting deadline.

Musk's confrontation with the SEC has a long history. In April 2022, he failed to persuade a New York judge to lift the 2018 agreement he reached with the Securities and Exchange Commission. The agreement requires that if his remarks on social media have the potential to affect Tesla's stock price, they must be first examined by the company's lawyers.

Chester Spatt, a finance professor at Carnegie Mellon University's Taper School of Business, said buying Twitter also meant he was putting himself closer to the SFC.

If the deal doesn't go smoothly, Twitter could struggle to repay the $13 billion in new borrowings it expects to take on.

In this way, Twitter's financial situation will be worse, and Musk and the other owners of the company will have to decide whether to try to provide more financial support.

He could borrow more money with Tesla stock, sell some stock, or even borrow money with other valuable assets, like his stake in SpaceX, which could be worth more than $40 billion.

Such a chain reaction, a bottomless pit of debt, the three companies should not want to see. Of course, this business tycoon should not let this happen.

This article was originally produced by Automotive Business Review

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