Twitter – The price of free speech pt. III

Musk gains the upper hand but at a price.

• Elon Musk is getting closer to acquiring Twitter but he still needs to deal with the poison pill and the level of risk that he is assuming (and putting onto Tesla shareholders) is not insignificant.
• Elon Musk has announced that he has secured a $46.5bn financing package which will enable him to purchase all of Twitter’s outstanding shares giving him outright ownership.
• However, a proportion of this is a $12.5bn margin loan against which he has pledged a portion of his shares in Tesla which have a current value of $62.5bn.
• The announcement of this structure has coincided with what can only be described as a “softening” of Twitter’s board as it met with Mr Musk yesterday to discuss the acquisition.
• I suspect that this “softening” was triggered by a number of large shareholders arriving at the same conclusion that I have which is that Mr Musk’s offer represents excellent value.
• Hence, if it continues to resist on ideological grounds (see here), the case against it for a breach of fiduciary duty will only get stronger.
• This is why I think that the probability that Mr Musk succeeds in taking over the company has improved materially over the weekend.
• However, the margin loan he has taken is risky because if the covenants of the loan are breached then a very large tranche of Tesla shares will be indiscriminately sold into the open market.
• The risk with all margin loans of this nature is that the value of the collateral asset falls which then triggers a margin call and the collateral to be sold great exacerbating the downward trajectory of the asset in question.
• With Tesla shares, this is riskier than usual given how volatile they are, but I suspect that they would have to fall very far indeed in order to trigger the margin call in this case.
• This is because Mr Musk has tendered $62.5bn of Tesla shares (at current prices) for a loan one-fifth of the size ($12.5bn) implying that Tesla would need to fall by 80% in order to trigger a margin call.
• We have no idea what covenants have been put in place for this loan, but I am pretty sure that Tesla shares will have to take a really big hit before any real trouble ensues.
• Hence, while this does raise risks for Tesla shareholders, it is a risk that is very unlikely to materialise at this time.
• Tesla has just reported good results and sentiment remains pretty strong which will help to support its outlandish valuation even as the market softens with the upward march of interest rates.
• I continue to be unwilling to get involved in either direction on Tesla as I have long since given up trying to predict when the valuation is going to crack.
• There are much better places to look to invest in electrification and autonomous driving like nuclear power and overly sold Lidar companies.