Shares of Twitter fell about $2, meaning investors stand to make about 9% if Musk’s offer goes through.
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Twitter stock now offers a 9% return to Elon Musk’s takeover price following the drop in the shares Tuesday.
Shares of Twitter (ticker: TWTR) fell $2.02, or 3.9%, to $49.68 Tuesday, meaning investors stand to make about 9%, assuming Musk completes the deal to buy the company for $54.20 a share, or $44 billion.
That’s a reasonably wide, double-digit annualized arbitrage spread for a deal that could be completed by the end of 2022. Twitter said in announcing the transaction Monday that it expects the transaction to close in 2022.
The decline in Twitter Tuesday reflects some concerns about Musk’s ability to finance the transaction given the sharp drop in Tesla (TSLA) stock, which fell 12.2% to $876.42 Tuesday.
Musk plans to put up $21 billion of equity financing for the deal but hasn’t spelled out yet how he will get the money. He is also borrowing $12.5 billion in a margin loan from a group of Wall Street banks secured by part of his Tesla stake.
The drop in Tesla stock means Musk will have to pledge more of it for the margin loan if the decline isn’t reversed. He also might sell Tesla stock to finance the equity portion of the deal. The need for Musk to use Tesla stock to at least secure part of the deal financing has meant that shares of Twitter and Tesla are now linked. If Tesla stock rallies, so likely will Twitter stock, and vice versa.
There isn’t expected to be any regulatory challenge to Musk’s offer for Twitter, although there could be some political pushback.
Gary Black, the managing partner of the Future Fund with more than 160,000 followers on Twitter, tweeted earlier this afternoon that Musk should outline his financing plans for Twitter. Black follows Tesla closely and has been bullish on the stock since it traded at a fraction of its current price.
Black tweeted that Musk has three options. He can take in equity partners, including private equity, or offer current Twitter investors the chance to remain investors in a private Twitter. He can sell Tesla shares or those of the private SpaceX. He could monetize other assets, or rely on some combination of these options.
Black tweeted Tuesday that Musk can “squash the selling pressure [in Tesla stock] by simply saying he doesn’t intend to sell any TSLA shares to pay for his TWTR deal.”
Until Musk lays out his financing plans, the Twitter arbitrage spread could remain wide, and might stay somewhat elevated even if Musk assuages the markets, because the Twitter deal is a large one for the arbitrage community on Wall Street to absorb.
The Twitter merger agreement document is expected soon, and could provide more detail about Musk’s financing plans.
Write to Andrew Bary at [email protected]
