Elon Musk’s Buyout of Twitter

How is the acquisition funded?

The Twitter Board of Directors has agreed to Elon Musk’s buyout of Twitter’s stock, and both parties have executed a Definitive Merger Agreement. The specific details of the agreement can be found here. The deal is expected to close sometime in 2022. The time lag between signing and closing the transaction is subject to various conditions including a shareholder vote and various regulatory reviews

At first, it seemed unlikely that Elon Musk’s offer to purchase Twitter for US$54.20/share would be approved by Twitter’s Board. Part of this is because earlier Musk filings did not indicate that funding had been secured. Additionally, Twitter’s Board adopted a poison pill that would essentially block any Musk takeover without Board approval. However, a subsequent filing by Musk’s team outlined committed financing, the details of which are shown below (link here showing funding details in the exhibits). This no doubt made Twitter’s Board more receptive to Musk’s offer.

The committed debt Musk has arranged is relatively straightforward. It includes a US$6.5 billion term loan, a US$0.5 billion revolving credit facility plus two bridge loans (totaling US$6.0 billion) from investment banks that will eventually be taken out by high-yield bonds. This means that Musk is responsible for the remaining amount of roughly US$33.5 billion, which represents roughly 72% of the funds.

Musk will borrow US$12.5 billion using a margin loan collateralized by Musk’s ownership of Tesla stock. If we use a recent Tesla price of US$850/share and a 20% Loan-to-Value, this implies that Musk will need to pledge roughly 73.5 million Tesla shares to secure this margin loan. These shares are valued at roughly US$62.5 billion as shown below.

Per last year’s Tesla proxy statement (from August 2021), Musk has roughly 88.3 million shares already pledged as collateral to secure certain personal indebtedness as shown below. He currently owns approximately 172.6 million Tesla shares. Assuming the 88.3 million shares are still pledged as other collateral, and including the shares pledged for the margin loan, Musk has pledged 94% of his Tesla stock ownership.

As a refresher, a margin loan is extended by a bank or brokerage house and collateralized by holdings of other securities. In Musk’s case, his collateral is his unencumbered ownership of Tesla stock. Should Tesla stock collapse, Musk would be obligated to add collateral (more cash in this case), which is known as a margin call.

In summary, Musk is contributing US$21.0 billion in equity financing, but also US$12.5 billion via a margin loan on his existing Tesla ownership. However, Musk is also searching for other potential equity investors (including convertible security owners) to contribute equity to the buyout. If Musk doesn’t find any equity partners, he will effectively be responsible for US$33.5 billion, which represents 72% of the Twitter buyout total of US$46.5 billion.

As of April 28 and April 29, Musk sold approximately 9.6 million Tesla shares as indicated in this document. This changes his Tesla ownership from the 172.6 million shares marked in the table above down to 163.0 million shares. It is unclear what he will be using the sales proceeds for.

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