Tesla Stock Is Pricing In $30 for Twitter Fear. Here’s How We Know.

Text size

Twitter profile of Elon Musk. Scott Olson/Getty Images

Tesla and Twitter stocks are linked, for at least a little while, as investors wonder how Tesla CEO Elon Musk will fund the equity portion of the deal.

The linkage might irritate Tesla (ticker: TSLA) shareholders, but there isn’t a lot they can do but wait for more details to emerge. Figuring out the deal spread between Tesla and Twitter (TWTR) stock isn’t easy, but Barron’s has an idea of how to frame this unconventional deal.

Start with recent stock moves. The day after severe selling, Tesla stock is bouncing, up about 4.5% in early trading Wednesday. Twitter stock, however, is down about 1.5%. The S&P 500 and Dow Jones Industrial Average are up about 0.6% and 0.4%, respectively.

Why Twitter is dropping with an all cash offer from the world’s richest man is a another good question. The deal spread is now 11%.

A falling Twitter stock price, in one sense, means that investors are less certain that the deal will close. If the deal doesn’t close, either Twitter or Musk get $1 billion as a breakup fee, depending on who is responsible for the split.

It isn’t clear why Tesla stock is rising today. One possible reason is that as odds for a completed Twitter deal falls, Tesla investors feel a little better. So credit some of Tesla’s move to Twitter’s drop.

Newsletter Sign-up

The Barron’s Daily

A morning briefing on what you need to know in the day ahead, including exclusive commentary from Barron’s and MarketWatch writers.

Tesla shares plunged 12% Tuesday. Twitter wasn’t responsible for all of that drop. The Nasdaq Composite fell 4% in what was a brutal day for all investors, not just the ones holding Tesla stock.

Tesla is about twice as volatile as the Nasdaq, in recent months, so about 8% of Tesla decline can be attributed to the overall market.

That leaves 4% for investors to mull over. It could be the distraction factor. After all, Musk will be occupied with yet another job—fixing Twitter.

“With the Twitter win…Now comes the Tesla stock and distraction worries,” wrote Wedbush analyst Dan Ives on Wednesday. The idea that Musk will have too much on his plate will be a factor until “proven otherwise,” according to Ives.

The stock worries are about the equity-financing portion of the Twitter deal. Musk has committed to $21 billion in equity financing for the Twitter buy, but he hasn’t said where the cash will come from. Ives wrote that partners are possible, but there isn’t much detail available.

Tesla and Musk didn’t respond to Barron’s questions about equity financing.

“As we have said before,” Ives added in his report, “the Twitter transaction was never ideal for Tesla investors as the stock will now ultimately bear the burden of acquiring Twitter through its equity-based financing mechanics.”

The Nasdaq is up about 1.3% in Wednesday trading. So over the past two days, Tesla stock is now down about 8.4%, while the Nasdaq is off about 2.7%. Now the spread to normal trading for Tesla stock is about 3%, or $30 of the pre-Twitter deal price for Tesla shares.

There is $30 in the stock for Twitter-related worries. Whether or not that’s the right amount is for investors to decide.

That calculation isn’t a typical arb spread—which is just the difference between a buyout price and where a stock being acquired is trading—but this spread is one Tesla investors will be watching for a while.

Write to Al Root at allen.root@dowjones.com