Elon Musk rejects margin loan from Twitter bid, making it a little less risky

μιLon Musk has dismissed one of the most risky elements behind his $ 44 billion Twitter bid, a move you can read as smart as one-way markets have moved in recent weeks: Down, down, down.

Musk rejected a plan to take out a margin loan as part of its $ 54.20 buyout per share, according to a new SEC filing. Initially, it intended to use such a $ 12.5 billion loan, but several weeks ago, it halved the amount after bringing additional investors into the deal. Now, he says he will earn that $ 6.25 billion in extra equity. That does not affect the other $ 13 billion in standard corporate debt involved in the deal.

If Musk had taken out the margin loan, he would have had to secure it with his stake in Tesla. Under the terms of the loan, Musk was to sell $ 31.25 billion worth of Tesla shares. With the stock price falling, he was in a position to need more Tesla shares to cover the loan. Margin loans are a bet in the best of times. Even more so during a financially difficult period, such as the period we are inside right now.

If things got worse, there was an outward chance that Musk would face a so-called margin call, when the stock that secures a margin loan has deteriorated and a lender is forced to repay a loan. If that were the case, Musk would need to sell Tesla shares around the world, further reducing the share price. (The most dramatic margin calls lead to dramatic endings, spirals that have completely consumed and ended companies in the past. This happened recently to Archegos Capital Management. It probably would not have happened to Tesla, but it certainly would have made matters worse.) Musk’s creditor, Morgan Stanley had set a 40% drop in Tesla shares to trigger such an event. And with Tesla’s share already down nearly 25 percent last month, you have a sense of Musk’s condition: it has changed significantly since he first spoke about taking over Twitter in April.

As with everything about Musk and Twitter, there are some complications to this development. Mainly, where will he get the $ 6.5 billion equity to replace the margin loan?

You will need to do one of two things. Possibly sell more Tesla shares, not a great scenario in a declining market. This will further reduce Tesla’s share. Or he will need to find more friends to join his cheerful band, it is also not a great script. If it was difficult to convince investors a month before the stock began to slide – and due to the lack of traditional high-profile names on the deal table, it certainly seems to have been difficult – it would be even harder to talk about the world. now. In low markets, investors shy away from companies like Twitter, which are less profitable and forever something like a commercial disappointment. They do not tend to run towards them. Shares of Twitter closed at $ 37.16 on Thursday, well below Musk’s offer of $ 54.20.

Not only that! Imagine going on a fundraising tour right now to buy a company you just spent the last few weeks maligning, accusing it of mismanaging key elements such as valuing junk content. It’s as if Musk is looking for someone to work with in a house-up after he stood in the street and shouted about how the place has rats and poor wiring. (But do not worry, I know a good exterminator, he will obviously need to tell any new co-investors. This house will be wonderful after I finish it. Justifiably, they may then find him somewhat funny.)

And here’s the other issue: Didn’t Musk say the whole thing is waiting for these unwanted numbers? In a way, you can see his decision on a profit margin loan as a sign that he is not waiting and that Musk is waiting to follow. Why drop the margin loan and make the SEC deposit if it did not? AHA. It seems that it can finally take its place even if it has parasites.

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