Elon’s Razor

Photo: Pascal Le Segretain/Getty Images
William D. Cohan
May 29, 2022

The most important thing to understand about Elon Musk’s public dickering over whether he will buy Twitter at $54.20 a share is that Elon has already signed a merger agreement committing him to buy Twitter for $54.20 a share. It’s a legally binding agreement and the Twitter board has said it intends to enforce it—M&A code for don’t mess with the deal unless you want a legal fight. Elon has a few ways to renege, of course, but not many. He can find “something” during his due diligence of Twitter that constitutes a reason for him to abandon the deal. But I don’t see what that could be, and it’s certainly not an abundance of “bots.” Obviously, if he can’t come up with the money he has committed to the $44 billion deal, then he would have an out, and then he could presumably pay his $1 billion break-up fee and walk away.

But from all appearances, Elon is indeed still working hard to get his financing in order. Earlier this week, he revised his plan in a regulatory filing, eliminating his $6.5 billion of margin loans (secured by Tesla stock, down from what was once a $12.5 billion margin loan) and thus raising his equity commitment to an astounding $33.5 billion. That should be a relief for Tesla shareholders, who would have been exposed to a potential share price death spiral, were Elon called upon by his bankers to unload his Tesla stock. The big question now is whether he can actually raise that much equity. If he can, then Elon will own Twitter. If he can’t or decides he doesn’t want to, he won’t own Twitter. 

So here’s where things stand. Of the $33.5 billion he needs, Elon has announced that he has commitments for  $7.1 billion from an eclectic group of 18 friends and investors—Larry Ellison, Alexander Tamas, Changpeng Zhao, the Witkoff family, and so on. He’s also announced that Prince Alwaleed, in Saudi Arabia, has agreed to roll over his stake in Twitter into Elon’s Twitter, a total of $2 billion (at $54.20). Elon also won’t have to buy the $4 billion of Twitter shares that he already owns (at $54.20). Taken together then, Elon can account for $13.1 billion of the $33.5 billion of equity he has pledged to raise. That leaves him with an equity hole of $20.4 billion. 

That kind of gap would be a non-starter for nearly everyone, obviously. But Elon is among the world’s richest people, with a net worth of around $225 billion at the moment. So it seems reasonable to think that he could come up with the $20 billion he needs to complete the deal, especially since he no longer is obtaining a margin loan on his Tesla stock for the Twitter acquisition. He still could margin his Tesla stock in order to get the $20 billion, but that is no longer an explicit component of the deal. He could also sell enough Tesla stock to give him the after-tax proceeds of $20 billion that he needs. The lower-risk, more tax-efficient strategy would be to find more equity partners, which presumably Elon’s advisors at Morgan Stanley are trying to do, but since Elon has said nothing about new investors since May 4, I suspect that is slow going at the moment, especially since he’s agreed to pay 44 times Twitter’s EBITDA and he’s using so much equity to do it. 

To wit, it’s notable that none of the big private equity firms have signed up with Elon to buy Twitter, but it’s not surprising since the purchase price is so high and the leverage is so low. In other words, the structure of Elon’s Twitter deal is well beyond the sweet spots of the big private equity players, and his recent decision to eliminate the margin loan and to increase the equity contribution makes it even less likely that the Blackstones and KKRs and Apollos of the world might be interested. Now, he could do a convertible preferred deal with this L.B.O. crowd that would guarantee them a nice annual return, plus the opportunity to convert into the equity of Twitter if things go well. If I were at Morgan Stanley, still working for the old boss, Rob Kindler, I’d be exploring with the big private-equity players a convertible preferred to help Elon fill the equity hole.

Another option for Elon is, of course, a price cut. The Twitter stock, now trading around $40 a share, has recovered somewhat along with the rest of the financial markets this past week. But it is still trading 26 percent below the $54.20 in cash that Elon is offering. This is highly unusual, especially for an all-cash deal. If you were to buy Twitter stock today at $40 and then, in October, Elon were to pay you $54.20 for it, you’d have made a cool 26 percent on your money (more on an annualized basis). That’s a pretty great investment in any market, but in one as shaky as the current financial market, that would be an outstanding return. But the smart money seems to be staying away from that trade, which means Wall Street believes one of two things: Either Elon intends to walk away from the deal, preferring to pay the $1 billion break-up fee and buy himself a bunch of lawsuits or he intends to try to negotiate a price cut with the Twitter board. 

Walking away from the deal would be a disaster for Elon and damage his reputation on Wall Street, probably irredeemably. His better option—if he must—is to see how far he can go along the price-cut path. Since he seems to like the “420” construct, I’m thinking his new offer for Twitter will be $44.20 a share. That’s an 18 percent price cut, more or less consistent with the drop in the Nasdaq since he made his offer for Twitter. At that price, both Goldman Sachs and JPMorgan Chase would likely still be able to say the deal was “fair” from a financial point of view to Twitter shareholders—although it would be a more painful opinion for them to deliver—and everyone would be able to save some face and move on toward the October closing. I suspect such negotiations are already well underway given how relatively quiet Elon has been about Twitter in the last few weeks. At $44.20, some of the arbitrageurs could salvage a portion of their investment, which would save them from total disaster on the deal. 

Of course, if Elon asks for and gets the price cut of $10 a share, that would reduce Elon’s equity hole by about $8 billion, leaving him with a much more manageable $12 billion of equity to find. And if he can get his buddy Jack Dorsey to roll over his 18 million Twitter shares, that would reduce the equity hole for Elon by another $1 billion or so. Now if Elon recuts the deal and then walks away from that, then he’ll probably never have lunch in this town again.