Analysis by Liam Denning | Bloomberg
December 8, 2022
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GRUENHEIDE, GERMANY - MARCH 22: Tesla CEO Elon Musk attends the official opening of the new Tesla electric car manufacturing plant on March 22, 2022 near Gruenheide, Germany. The new plant, officially called the Gigafactory Berlin-Brandenburg, is producing the Model Y as well as electric car batteries.
(Photo by Christian Marquardt - Pool/Getty Images)
Ever since Elon Musk launched his takeover of Twitter Inc., fans of Tesla Inc. have worried about the genius getting distracted. And during the new Twitter’s first six weeks — has it only been that long? — Musk has certainly come across a bit distracted. Addled, even.
Now we learn that, through the magic of finance, this squishy risk of distraction may be crystalized into a real overhang on Tesla’s stock. Bloomberg News broke the story late Wednesday that Elon Musk’s bankers are considering new margin loans to him, backed by part of his stake in Tesla, to effectively replace the most expensive debt on Twitter’s balance sheet. If that happens, it would be at once entirely unsurprising and yet take Musk’s empire into new and potentially dangerous territory.
To recap, Musk, along with some co-investors, paid about $44 billion for Twitter, with $13 billion of that landing on the company’s balance sheet as debt. Ordinarily, the bankers who put up that debt would sell it on to investors. But the takeover of Twitter has been anything but ordinary, and the banks have struggled to offload the debt, with reports of bids coming in at just 60 cents on the dollar. Given the annual interest bill for Twitter is estimated at about $1.2 billion, or more than a fifth of revenue, the banks are even less minded to hang onto that debt than usual. Why not, instead, effectively swap it out for more quasi-equity in the form of a loan to Musk backed by shares in his $550 billion electric vehicle juggernaut?
The obvious answer: Leverage on top of leverage at a social media company that’s already resorting to Hunter Biden conspiracies to gin up clicks sounds unpromising. But the template is temptingly already there. Musk’s bankers have lent money against Tesla collateral for years; he had about 89 million shares pledged at the end of March, worth $32 billion then and about $15.5 billion today.
Moreover, the commingling of Musk’s various enterprises is also long-standing. Hardly anyone seemed to care when it was reported that Tesla engineers were brought in to review Twitter’s code after Musk took control, even though Tesla’s investors haven’t signed up for the company’s resources being diverted to the chief executive’s latest pet project. This is just how Musk rolls. Recall that one of his other companies, Space Exploration Technologies Corp, or Space X, bought bonds from another company where Musk was chairman — and his cousin was CEO — SolarCity Corp. Then SpaceX, along with Musk and his cousin who both also bought those bonds, was effectively bailed out as Tesla swooped in to buy SolarCity just before it very likely would have plunged into bankruptcy (see this and this).
This somewhat unorthodox approach to governance has all been forgiven — by investors and bankers alike — because Tesla’s stock has been on a one-way trip to the stars. Though not of late. Having peaked at a staggering $1.24 trillion about a year ago, Tesla has shed a similarly staggering $685 billion since. This owes most to a widespread selloff of cleantech darlings after the euphoria of 2021 and, perhaps more pernicious, troubles in China where Tesla’s big bet on growth has run into harsh pandemic lockdowns and a wall of domestic EV competition — the latter perhaps portending trouble in the US, where rival brands are also launching more electrified models.
Against that background, Musk’s Twitter fetish certainly hasn’t settled nerves, especially as he has been a big seller of Tesla stock himself, some of which presumably funded the deal. And now Tesla bulls face the prospect of his fetish being underwritten to an even greater degree by their favorite company’s paper.
If the debt-for-quasi equity swap happens, it will confirm (if confirmation was needed) that Twitter’s valuation has slumped — why effectively collateralize its balance sheet with Tesla stock otherwise? — and even perhaps raises a question about Space X: If that company is worth $125 billion, as its last funding round suggested, why can’t Musk sell some of that for cash?
I (half) joked recently that, in light of what happened with SolarCity, we shouldn’t be too surprised if Tesla eventually announces that it needs to own an in-house social media platform. Even without that, though, these new loans would tie the fate of these vastly different enterprises closer together. Recent polling suggests Musk’s refashioning of Twitter may be putting off some US drivers from buying Tesla vehicles. I tend to think that’s hard to unpick from other factors such as there just being more competing models available. Nonetheless, though, one can imagine a scenario where, seeking to shore up Twitter, Musk doubles down on his provocations in the hope it keeps folks engaged — which in turn dents the brand of his real source of wealth. Owning a piece of Tesla has always meant owning a piece of whatever vision Musk decides to follow. Right now, his gaze is fixed on that infinitely scrolling feed.
Ever since Elon Musk launched his takeover of Twitter Inc., fans of Tesla Inc. have worried about the genius getting distracted. And during the new Twitter’s first six weeks — has it only been that long? — Musk has certainly come across a bit distracted. Addled, even.
Now we learn that, through the magic of finance, this squishy risk of distraction may be crystalized into a real overhang on Tesla’s stock. Bloomberg News broke the story late Wednesday that Elon Musk’s bankers are considering new margin loans to him, backed by part of his stake in Tesla, to effectively replace the most expensive debt on Twitter’s balance sheet. If that happens, it would be at once entirely unsurprising and yet take Musk’s empire into new and potentially dangerous territory.
To recap, Musk, along with some co-investors, paid about $44 billion for Twitter, with $13 billion of that landing on the company’s balance sheet as debt. Ordinarily, the bankers who put up that debt would sell it on to investors. But the takeover of Twitter has been anything but ordinary, and the banks have struggled to offload the debt, with reports of bids coming in at just 60 cents on the dollar. Given the annual interest bill for Twitter is estimated at about $1.2 billion, or more than a fifth of revenue, the banks are even less minded to hang onto that debt than usual. Why not, instead, effectively swap it out for more quasi-equity in the form of a loan to Musk backed by shares in his $550 billion electric vehicle juggernaut?
The obvious answer: Leverage on top of leverage at a social media company that’s already resorting to Hunter Biden conspiracies to gin up clicks sounds unpromising. But the template is temptingly already there. Musk’s bankers have lent money against Tesla collateral for years; he had about 89 million shares pledged at the end of March, worth $32 billion then and about $15.5 billion today.
Moreover, the commingling of Musk’s various enterprises is also long-standing. Hardly anyone seemed to care when it was reported that Tesla engineers were brought in to review Twitter’s code after Musk took control, even though Tesla’s investors haven’t signed up for the company’s resources being diverted to the chief executive’s latest pet project. This is just how Musk rolls. Recall that one of his other companies, Space Exploration Technologies Corp, or Space X, bought bonds from another company where Musk was chairman — and his cousin was CEO — SolarCity Corp. Then SpaceX, along with Musk and his cousin who both also bought those bonds, was effectively bailed out as Tesla swooped in to buy SolarCity just before it very likely would have plunged into bankruptcy (see this and this).
This somewhat unorthodox approach to governance has all been forgiven — by investors and bankers alike — because Tesla’s stock has been on a one-way trip to the stars. Though not of late. Having peaked at a staggering $1.24 trillion about a year ago, Tesla has shed a similarly staggering $685 billion since. This owes most to a widespread selloff of cleantech darlings after the euphoria of 2021 and, perhaps more pernicious, troubles in China where Tesla’s big bet on growth has run into harsh pandemic lockdowns and a wall of domestic EV competition — the latter perhaps portending trouble in the US, where rival brands are also launching more electrified models.
Against that background, Musk’s Twitter fetish certainly hasn’t settled nerves, especially as he has been a big seller of Tesla stock himself, some of which presumably funded the deal. And now Tesla bulls face the prospect of his fetish being underwritten to an even greater degree by their favorite company’s paper.
If the debt-for-quasi equity swap happens, it will confirm (if confirmation was needed) that Twitter’s valuation has slumped — why effectively collateralize its balance sheet with Tesla stock otherwise? — and even perhaps raises a question about Space X: If that company is worth $125 billion, as its last funding round suggested, why can’t Musk sell some of that for cash?
I (half) joked recently that, in light of what happened with SolarCity, we shouldn’t be too surprised if Tesla eventually announces that it needs to own an in-house social media platform. Even without that, though, these new loans would tie the fate of these vastly different enterprises closer together. Recent polling suggests Musk’s refashioning of Twitter may be putting off some US drivers from buying Tesla vehicles. I tend to think that’s hard to unpick from other factors such as there just being more competing models available. Nonetheless, though, one can imagine a scenario where, seeking to shore up Twitter, Musk doubles down on his provocations in the hope it keeps folks engaged — which in turn dents the brand of his real source of wealth. Owning a piece of Tesla has always meant owning a piece of whatever vision Musk decides to follow. Right now, his gaze is fixed on that infinitely scrolling feed.
BLOOMBERG BOILERPLATE SAYS ITS NOT RESPONSIBLE FOR THIS OPIONION
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