Elon Musk needs an exit from his ill-timed Twitter bid

You don’t have to look hard for the reason for Elon Musk’s decision to put his $US44 billion ($63.5 billion) bid for Twitter “temporarily on hold.” A check on two share prices would do the trick.

One is Twitter’s and then other Musk’s Tesla; their prices entwined ever since he spent $US2.9 billion to acquire 9 per cent of Twitter early last month and then followed up with an agreed $US44 billion deal to buy the entire company.

Elon Musk’s bid to takeover Twitter could be in jeopardy.Credit:AP

When Musk’s interest in Twitter was first revealed its share price rocketed from just under $US40 to $US50 before peaking at $US52 a share on the day the agreed offer was announced. They are now trading back around $US40 a share.

Tesla shares, which underwrite Musk’s claim to be the richest person on earth, were trading at $US1145 when his holding was first disclosed. They fell to just under $US1000 when the board approved the bid but have since tumbled to about $US764.

At $US40 a share Twitter is worth a bit over $US30 billion, or $US14 billion – 32 per cent – less than Musk has committed to paying. Tesla, in the meantime, has lost about a quarter of its value – or nearly $US240 billion – since his interest in Twitter was made public.

The backdrop to those particular share price movements is the continuing broader meltdown in sharemarkets. Since Musk’s offer was agreed to by the Twitter board the S&P500 index has fallen another 6.4 per cent and the tech-oriented Nasdaq market 9.2 per cent.

Thus, in a volatile and threatening market for equities Musk has committed to over-paying, badly, for a company that loses money and had negative cash flows last year and which, if the bid were to succeed, would have to service the debt component of the bid’s financing. Moreover, his own ability to offer cash is largely underwritten by his Tesla shares, which have plummeted.

The original offer was going to be funded by $US27.5 billion of equity and $US16.5 billion of debt, with Musk arranging what is effectively a margin loan secured by a tranche of his Tesla shares that, at the time, covered the loan six times over, for about $US12.5 billion of the equity component.

There was reportedly a trigger in the covenants for the margin loan that would force its repayment or perhaps enable the banks to seize and sell the underlying Tesla shares pledged as collateral if the Tesla share price fell 40 per cent.

Since the initial announcement Musk’s advisers have been scrambling to find co-investors to reduce Musk’s exposures. They’ve had some success, raising about $US7 billion from an investor group that include Sequoia Capital, Qatar Holdings and Saudi’s Prince Alwaleed bin Talal. They’re looking to raise more.

It would appear that Musk has belatedly recognised that he’s at risk of paying far too much for Twitter and, given the continuing implosion in sharemarkets, putting a massive amount of his personal wealth – both his paper wealth and the $US8.5 billion he raised by selling Telsa shares at the start of the process – in jeopardy and destabilising the already sliding Tesla share price in the process.

The value of Tesla has shrunk by $US240 billion since Musk made public his Twitter interest. Credit:Bloomberg

His problem is that there is no legal exit from his announced bid. The Twitter board can hold him to it unless he can’t raise the funding and both the Twitter board and Musk would probably be sued by Twitter investors if he tried to walk away or reduce the price.

Nevertheless, Musk does seem to be attempting to lay the ground to either abandon the bid or renegotiate its terms and lower the price.

While claiming that he remains committed to the deal, he has cited a recent Twitter filing that said fake accounts on its social media platform account for less than five per cent of its users for putting the bid on hold while his bid team tests the Twitter claim.

Twitter’s estimate of the fake accounts is one it has made routinely in past filings but one which most analysts believe understates the actual proportion.

Twitter does insert some qualifications into the filings, explicitly saying the number could be higher, and Musk did have the opportunity, which he didn’t take, to conduct a proper due diligence before committing to the offer.

That makes Musk’s pausing of the deal look like a pretext to renegotiate the offer price or try to walk away.

If he were able to ditch the bid he would be up for a $US1 billion “break” fee, although that might ultimately be seen as a small price to pay to avoid throwing away many multiples of that amount and putting his personal fortunes at risk by proceeding with the offer. Beyond the margin loan for the Twitter bid Musk has raised cash previously using his Tesla shares as security.

It would appear that Musk has belatedly recognised that he’s at risk of paying far too much for Twitter and, given the continuing implosion in sharemarkets, putting a massive amount of his personal wealth in jeopardy and destabilising the already sliding Tesla share price in the process.

The bid for Twitter made little financial sense when it was first unveiled – it looked like a vanity purchase rather than a rational play – but it looks far worse in the current uncertain sharemarket environment and with the currency that underpins Musk’s own position, Tesla shares, so heavily devalued.

It is the kind of deal that wouldn’t have looked so out of tune with the conditions had it been made before the implosion in tech stocks started in November last year. At their peak in early November Tesla shares were trading at just under $US1230 and the company was valued at $US1.3 trillion, or about 40 per cent more than it’s valued at today.

Soaring inflating and the sharp rise in interest rates that has occurred as central banks start to tighten monetary policy by raising rates and withdrawing liquidity punctured the boom in tech stocks that had inflated Tesla shares.

There’s now a bear market in tech and an even more bearish market in Tesla shares, thanks to the Twitter bid, even though Tesla’s operational and financial performance has been robust. Investors are simply paying a lot less for earnings or, in Twitter’s case, potential future earnings.

The post-financial crisis eras of near-zero interest rates and unlimited liquidity has shifted abruptly to the new post-pandemic challenges of rapidly rising rates, steadily diminishing liquidity and the brutal unwinding of the very stretched valuations that the previous era encouraged.

Musk appears to have failed to recognise, until after he was on the hook for $US44 billion, the extent of the change in the environment. Having belatedly realised his predicament, the multibillion dollar question marks floating over the future of both Twiitter and Tesla and their share prices is whether he can actually do anything about it.

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