Will Elon Musk’s $150 Billion Tesla Margin Debt Benefit Bill Gates?

BRAZIL – 2022/04/11: In this photo illustration, the Twitter logo is displayed on a smartphone with … [+] Elon Musk’s official Twitter profile. The billionaire Elon Musk bought 9% of Twitter, an investment of USD 3 billion. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

SOPA Images/LightRocket via Getty Images

Elon Musk is not taking my advice — he’s gone and bought Tesla for about $44 billion.

Along the way he has expressed his belief that Bill Gates has sold $500 million worth of Tesla stock short — borrowing and selling shares from a broker with hopes of profiting by buying them back at a lower price to repay the loan.

What could justify a bet that Tesla stock — which opens April 26 trade 20% below its all-time high of $1,243 a share — will fall? For that, you need look no further than how Musk — whose net worth Forbes estimates at $268.2 billion — will come up with the $44 billion in cash.

A big chunk of that cash will come from borrowing money from banks — secured by Elon Musk’s shares of Tesla. Another chunk will come from what he calls equity financing.

This financing structure could be bad for Tesla shareholders because it could mean that Musk sells lots of its shares.

How Musk Will Pay For Twitter

Musk will pay for Twitter through a combination of borrowing money and selling assets. According to the press release of the deal, Musk “has secured $25.5 billion of fully committed debt and margin loan financing and is providing an approximately $21.0 billion equity commitment.”

However, there is more here than meets the eye because much of that debt is margin loans against his Tesla stock — meaning if the stock drops enough, banks will demand that he repay the loan (selling Tesla shares could be one source of that cash).

According to Bloomberg this means that he will pay for Twitter with with “$13 billion of debt and $33.5 billion of his own money.”

Musk’s Allegation That Bill Gates Has a $500 Million Short Bet Against Tesla

On April 22, Musk expressed his belief that Bill Gates had sold short $500 million in Tesla stock — a modest 3% of whose shares are sold sold short, according to Barron’s. which wrote that Gates declined to comment on Musk’s claim.

If Musk and Twitter sign their deal, Musk will presumably be able to go to greater lengths to use Twitter to ridicule people who he sees as opposing his will.

He already goes further than most would. As Barron’s wrote, Musk used Twitter last Friday to express his belief that “Gates has sold short $500 million of Tesla shares. He went on to ridicule Gates’ bodily girth–with a photo, an emoji, and a crude comment.”

What’s more, Tesla has been doing pretty well recently so the basis for shorting the stock is somewhat questionable. For example, on April 21, Tesla reported a record profit of $3.3 billion for the first quarter while predicting 60% growth — to over 1.5 million —in the number of vehicles it will produce in 2022, according to the Wall Street Journal.

How Musk’s Financing For Twitter Could Push Down Tesla’s Stock

Regardless of whether Gates shorted Tesla stock, I definitely see some risk for Tesla shareholders in the way that Musk is financing his Twitter purchase.

That’s because $12.5 billion of that debt is a margin loan — and that could be bad for Tesla shareholders because, as Reuters reported, were Tesla’s stock to drop by 40%, Musk would have to repay that loan — possibly by selling Tesla shares.

More ominously, this deal increases Musk’s personal borrowing by 70%. According to Reuters, “He had already borrowed against $88 billion worth of Tesla stock, and the proposed acquisition financing for Twitter would push that figure to more than $150 billion.”

Tesla shareholders will pay for Twitter in other ways. Bloomberg highlights two of them:

Musk’s deal also puts him under pressure to come up with cash now and in the future.

For instance, Musk’s $21 billion equity commitment is a fancy way of saying he has to come up with that much cash either from money he has now or can generate by selling assets.

As Reuters noted, “It is not clear how much of the $21 billion in cash that Musk has committed to the deal is immediately available to him, and whether he would have to cash out on some of his assets. They include stakes in rocket maker SpaceX and tunneling startup Boring Co.”

On top of that, Musk will have to pay annual interest charges on the Twitter margin loan. A regulatory filing estimates that could amount to “about $1 billion annually in interest and amortization expenses,” noted Reuters, which represent about two-thirds of Twitter’s earnings before interest, taxes, depreciation, and amortization.

Is that cash flow likely to drop? Musk has said that he would like to reduce the amount of advertising on Twitter and increase subscription revenue. “The accepted bid puts a $5 billion-a-year advertising business into the hands of someone who has publicly questioned Twitter’s advertising business model,” noted the Journal.

If Musk can’t come up with a new business to replace Twitter’s advertising, where else will he look for that $1 billion loan repayment?

I would not sell Tesla stock short, but Tesla shareholders could bear the brunt of the financial obligations Musk has taken on to acquire Twitter.