Elon Musk needs 'massive loan' or big Tesla stock sale to buy Twitter

NEW YORK (BLOOMBERG) - Even for the world's richest person, US$43 billion (S$59 billion) is a steep price.

Mr Elon Musk's proposed all-cash offer to buy Twitter represents about one-sixth of his US$250.6 billion fortune. Yet, the vast majority of that wealth is tied to his stake in Tesla, the electric carmaker he co-founded that has surged in value over the past two years and lifted him to the top of the Bloomberg Billionaires Index.

The purchase is not straightforward, but Mr Musk has several financing paths. One option is to sell his Tesla shares outright. Another is borrowing against them to stage a leveraged buyout, possibly with outside partners.

Mr Musk, 50, currently has about US$3 billion in cash or other somewhat liquid assets after spending US$2.6 billion buying a 9.1 per cent stake in Twitter in recent months, according to Bloomberg calculations.

For Mr Musk to raise the additional US$36 billion in cash needed to buy the rest of Twitter would require selling about 36.5 million Tesla shares, or more than a fifth of his stake.

Such an exit could risk a slide in the company's share price - not to mention potentially raise questions about the commitment, financial and otherwise, of its chief executive.

His other option is to borrow against his positions in Tesla and space exploration company SpaceX.

"This becomes a hostile takeover offer which is going to cost a serious amount of cash," said Mr Neil Campling, head of TMT (Technology, Media and Telecommunications) research at Mirabaud Equity Research. "He will have to sell a decent piece of Tesla stock to fund it, or a massive loan against it."

But even for the wealthiest person in the world, there are limits: The Bloomberg index estimates that he has already borrowed about US$20 billion against his shares, leaving about US$35 billion remaining that he could theoretically take out against the two holdings.

"Musk's 'best and final' US$43 billion non-binding offer has numerous conditions, including completion of financing, which we believe give it a low probability of success," Mr Robert Schiffman, a Bloomberg Intelligence senior credit analyst, wrote on Thursday in a report.

Twitter shares fell 1.7 per cent on Thursday in New York, closing at US$45.08. Mr Musk offered US$54.20 per share in cash. Tesla shares declined 3.7 per cent.

Mr Musk had 52 per cent of his Tesla shares pledged as of June 30, according to the company's most recent proxy filing. The maximum that can be borrowed against pledged shares is 25 per cent of their value, according to a Tesla policy.

Since then, Mr Musk has increased his share count by exercising options. His 172.6 million shares are worth US$170 billion, meaning he could theoretically borrow US$42.5 billion by pledging all of them.

Mr Musk said in December 2019 that he had also pledged some of his SpaceX shares. His 47 per cent stake in the company is worth about US$47.5 billion, based on its October 2021 funding round.

If there is a similar maximum loan-to-value ratio, he could raise another US$12 billion by fully pledging his SpaceX position - although banks tend to be much more cautious funding a privately held position, given the lack of liquidity.

Also, Mr Musk has Tesla options worth US$54.1 billion that he might be able to borrow against.

Mr Musk said at a TED event in Vancouver on Thursday that he may seek to keep as many as 2,000 existing Twitter investors, reducing the cash he would need to take it private. "The intent is to retain as many shareholders as is allowed by the law," he said, adding that he "could technically afford" the full purchase price.

After Saudi Arabia's Prince Alwaleed bin Talal tweeted that the offer was not "close to the intrinsic value" of Twitter, Mr Musk asked how many shares the billionaire held in Twitter and for the Kingdom's view on freedom of speech for journalists.

Bank of America, Goldman Sachs and Morgan Stanley were three of the banks that provided Mr Musk personal loans, according to a 2020 Tesla filing. He has hired Morgan Stanley to advise on the Twitter bid, and his family office, Excession, is run by long-time adviser Jared Birchall, a former Morgan Stanley banker.

No matter how he goes about it, buying all of Twitter would be a stark shake-up of Mr Musk's empire. His purchase of a 9.1 per cent stake, first disclosed last week, marked his first significant diversification outside of Tesla and SpaceX. "I am not playing the back-and-forth game," Mr Musk said in Thursday's filing.

"I have moved straight to the end. It's a high price and your shareholders will love it. If the deal doesn't work, given that I don't have confidence in management nor do I believe I can drive the necessary change in the public market, I would need to reconsider my position as a shareholder."

Mr Musk has played up his devotion to both Tesla and SpaceX, frequently tweeting about their achievements and claiming to sleep on the floor of a Tesla factory to set an example to his employees.

Meanwhile, since disclosing his stake in Twitter, he has appealed to fellow users about potential moves and in one case, he suggested the website might be dying, given the lack of tweets from some celebrities.

In recent years, Mr Musk has indicated he is streamlining at least some aspects of his financial affairs.

He has sold multiple mansions in California after vowing to "own no home" in 2020. He currently lives in Texas, where he relocated the headquarters of Tesla last year.