Elon Musk Could Sell Tesla Stock To Pay Twitter’s $1.5 Billion Interest

Most acquisitions do not earn back their purchase price. Those that do pass four tests:

• They compete in fast-growing, profitable industries
• The merger makes both companies better off
• The companies’ future cash flows in current dollars exceed the acquisition price
• The two companies are integrated so they operate effectively once the deal closes

It is difficult to imagine a merger that fails the first three tests more egregiously than Elon Musk’s purchase of Twitter (while the fourth test is not strictly relevant for Tesla). And that is more bad news for Tesla shareholders who are in effect paying the price for Musk’s $44 billion purchase of the shrunken social network.

To be sure, Tesla did not acquire Twitter. However, Musk sold Tesla stock to help finance the deal — which probably contributed to its decline last year. Since he could not raise enough cash to finance the deal, he borrowed $13 billion.

A looming interest payment could leave Tesla shareholders worse off if Musk decides to sell more shares to avoid defaulting on the loan.

Twitter’s Industry Is Barely Growing And Thinly Profitable

Twitter made most of its money from digital advertising before Musk bought it. To be sure, digital advertising is a large market but its growth rate is expected to slow down in the years ahead.

According to Oberlo, 2022 digital advertising reached $602 billion in 2022. The bad news is that industry growth is decelerating. For example, industry revenue grew about 30% in 2021, slowed to 15.6% in 2022, and is expected to keep slowing down from 13.1% in 2023 to 6.8% in 2026.

For its part, Twitter has been an unprofitable player — it lost money in most quarters between 2012 and 2022, according to Statista — with a tiny market share. Twitter accounted for 0.9% of the global digital advertising revenue. After its acquisition by Elon Musk, Twitter’s share was expected to fall to 0.8% in 2022 and 2023, noted Statista.

Twitter Is Making Tesla Worse Off

Tesla has benefited from Musk’s prominence. One very tangible benefit is that Tesla does not spend money to market its vehicles.

Musk’s charisma helped to propel demand for Tesla vehicles and his use of Twitter to project himself on society saved Tesla a considerable amount of marketing spend. For example, in 2021, Tesla’s marketing expense per vehicle sold was $0 — compared to $468 for Ford, according to Visual Capitalist.

But his prominence on Twitter has become a double-edged sword. As I wrote January 15, Tesla’s ability to grow faster than its rivals depends on a superior customer perception of its value proposition — the ratio of benefits to price compared to that of rivals. Simply put, customers will buy from the electric vehicle (EV) maker that offers the most bang for the buck. Sadly for investors, Tesla’s brand — a component of that bang — is weakening.

How so? a Morning Consult survey published on January 12 found that Tesla’s brand favorability is “declining in the wake of CEO Elon Musk’s chaotic takeover of Twitter.” Specifically, Musk’s decision to allow hate speech onto Twitter — about which I wrote on January 1 — is cutting into Tesla’s brand favorability.

Morning Consult found that U.S. adults with favorable views of Tesla fell from 28.4% in January 2022 to 13.4% this month. The survey revealed that Tesla’s popularity is dropping among Democrats. Specifically, the number of Democrats who view Tesla favorably fell from 10.3% last month to just 3% in January. Meanwhile, Musk’s net favorability rating dropped from 22 points in February 2021 to nine points in November 2022, according to Morning Consult.

Musk’s decision to welcome back to Twitter such figures as Donald Trump and Michael Flynn, a former national security advisor linked to the January 6 assault on the U.S. Capitol, has prompted “some Tesla owners to announce on Twitter that they were getting rid of their vehicles and would-be customers to cancel planned purchases,” reported Forbes.

Twitter Merger Will Not Earn Back Its Purchase Price

I think it is unlikely that Musk’s purchase of Twitter will generate a positive net present value (NPV). Since Musk paid $44 billion to purchase Twitter in October 2022, its value has declined dramatically — somewhere between 56% and 66%.

How so? According to FT, “Fidelity, which owns a stake in the social media platform through a listed fund, has cut the value of its holding [by 56%] from $19.7 million in October to $8.6 million after Musk closed the deal. Technology equity analyst Dan Ives at Wedbush Securities said that Twitter was worth closer to $15 billion [on January 17] than the $44 billion Musk paid for it [a 66% decline].”

Were Musk to turn around and sell Twitter today, he would take a big loss. To be fair, I do not know whether Twitter is generating positive cash flow now or whether he has a realistic plan for how Twitter would generate enough future cash flow in today’s dollars to exceed his $44 billion purchase price.

With Twitter no longer a public company, it is difficult to assess the veracity of any information Musk shares about its financial condition or prospects. After all, Musk — facing charges that he misled investors in August 2018 with a Tweet that he had funding secured for a $420 a share Tesla buyout, according to the New York Times
NYT
— is not always a reliable narrator.

My guess is that Fidelity and Ives must have a reason for their drastic downward valuations of Twitter — most likely having to do with slim prospects for high future cash flows.

Twitter Interest Payment Could Hurt Tesla Shareholders

In the shorter term, Musk faces a cash call to pay the interest on the $13 billion he borrowed to complete the Twitter acquisition. Musk needs to scrounge up $1.5 billion to pay annual interest to the syndicate of banks — Morgan Stanley
MS
, Bank of America
BAC
, Barclays and Mitsubishi — who made the loan, noted FT.

His first payment could be due January 31 and he faces unpalatable options. These include

• Filing for bankruptcy — which would wipe out his $26 billion investment in Twitter,
• Buying the debt at a discount — possibly in bankruptcy or outside it,
• Refinancing the debt — bankers are discussing a deal to replace $3 billion of 11.75% unsecured debt with margin loans secured by Musk’s Tesla holdings, or
• Paying the interest on time — by selling more Tesla stock or using what Musk says is Twitter’s $1 billion in cash, according to FT.

For Tesla shareholders, it is worth noting that a whopping 63% of Musk’s existing Tesla shares “are already pledged as collateral for loans,” according to corporate filings.

This means that if the banks do not receive the interest payments on the loans, they can seize Musk’s Tesla stock and sell it to pay down the debt.

The value of Musk’s stake in Tesla had declined 65% in the year ending January 17 to $50 billion — representing a whopping $120 billion loss in value since April 2022 when Musk agree to buy Twitter.

He now has less room to raise cash by using his shares to borrow more money. While he could do that by exercising some of his stock options, “that would leave him with a large — and immediate — tax bill,” noted FT.

Musk’s value-decimating deal to acquire Twitter is probably going to cost Tesla shareholders even bigger losses.