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hey we got a lot to talk about regarding Twitter and a Tesla stock but first if you're an accredited investor I seriously want to invite you to what I think is an amazing opportunity to get founder shares in house hack go to househack.com learn everything about a startup that I'm creating and really what we're going to do in short is we're going to be buying the dip on real estate big investors are getting big bulk discounts on brand new construction wedge deals basically and there are plenty of deals and foreclosures that were already starting to see in the market and we're excited to start buying next year when we think the deals will be even better and if you want to join us in that and get founder shares at no upfront dilution mak stay tuned we're working on non-accredited investors so can Elon Musk still cancel his deal to purchase Twitter and will it finally stop the pain over a Tesla stock whether he cancels or not is there a potential scenario where Tesla stock does gets hammered no matter what happens we're going to talk about both of those questions in this video hey everyone meet Kevin here let's get started with Kenny Elon Musk still canceled so the best thing to do to answer this question is simply to go to the cancellation rights in the contract here you go well here is the Glorious section of the contract that tells you exactly what happens in the event that Elon Musk is able to terminate and for what reasons he's able to terminate there aren't many reasons as long as Twitter fulfills their obligations which obviously there's a whole Court battle about that which hasn't completed yet but clearly at this point it seems like elon's kind of taken the L on that core battle so far at least hey who knows we're gonna assume right now that we're not going to relitigate the entire court case we're just going to look at this cancellation right here and the cancellation right creates three ways that Elon Musk could terminate the transaction however in the event he terminated the transaction through one of those three ways he would be required parent in this case be Elon Musk will be required to pay Twitter a termination fee of 1 billion dollars okay and that states here that as described above if the conditions to parents and acquisition Subs obligations to complete the merchant are merger are satisfied and Elon Musk basically fails to consummate the merger as required including because of the following Equity debt and or margin financing is not funded Elon Musk parent will be required to pay a termination fee of 1 billion dollars now this is really interesting because at first I thought the three reasons he'd be able to cancel would actually just be two it'd basically just be if margin isn't funded or debt isn't funded but let's break these down one at a time and see where there's an interesting potential loophole maybe for Elon Musk so first debt financing isn't funded Elon Musk right now has about a 13 billion dollar loan uh commitment from Morgan Stanley and it is one heck of an expensive loan or at least it has gotten very expensive here is the section that talks about the interest rate from the debt financing commitment letter and it shows us that Elon Musk pays approximately sofr plus 4.75 or 4.5 let's just go conservative and say 4.5 percent as the spread on top of whatever sofr is well sofr has exploded it's gone from about 30 basis points to over 3 percent that means the following which I found on Twitter from this person at realmeet Kevin think interest rates going up hurts just ask Elon Musk his 12.5 billion dollar loan approximately 13.
right this is kind of where people round it from Morgan Stanley to buy Twitter now costs him an extra 375 million dollars more per year thanks to radhikes every single year 375 million dollars more that works out to over one million dollars per day in extra interest just to do this deal because j-pal raised rates okay so worth noting this is expensive but according to the opposing Council and again this is according to opposing counsel okay so it's probably a little biased but as of September 12th at least it they argue here that not only is the agreement not terminated but the bank commitment and Equity commitment letters still remain in effect now that is actually really important right there because if that is true that debt financing and Equity financing commitments are still in effect and Elon Musk has already canceled his need for margin financing he killed that rather than using Tesla stock as collateral he did the next best thing he just sold his Tesla stock and now he doesn't need the margin anymore obviously that created a lot of selling pressure on Tesla stock but anyway so according to at least the defendants the Twitter attorneys financing commitment letter is still active Audi commitments are still active however this is where things get a little bit interesting when it comes to the debt commitment I pretty much agree because the debt commitment actually says that the debt commitment doesn't expire until the outside date of six months after 4 20 when the deal was originally Inked I know it was Inked on 420.
but anyway that means October 20th is when the bank could actually renegotiate this loan and I have a suspicion the bank would love to renegotiate this loan that's because interest rates have moved in such a terrible direction that and and it's very difficult to get third parties to do unsecured financing deals right now deals that aren't like leaned up against the actual underlying property that the bank might end up being on the hook for this loan in terms of holding the loan see you got to remember companies like banks that put these deals together they get usually one to one and a half percent in advisory fees on these deals on a 44 billion dollar deal that could be like well quite frankly somewhere around 400 million dollars in advisory fees for this deal happening so like the banks are going to make out like bandits in advisory fees but they're potentially going to get reamed on that 12 and a half to 13 billion dollars of debt financing because usually Banks don't actually want your loan like people keep thinking oh the interest rate is higher like the bank's gonna make more money no the bank does not want a book of loans what they want is to write a loan going hey you promised to repay this money right okay here's the money all right now I got a promise to repay now I'm gonna maybe uh securitize this by bundling it together with a bunch of other loans and then slicing it up into uh you know a thousand little slices and selling it as uh bonds to you know corporate bonds to some Swedish investor or something and I'm sure everything will be fine nothing like 2008.
but anyway Banks don't want these what they want is the fee for doing this it's basically what you're doing is you're it's kind of like syndicating real estate but it's syndicating loans okay the bank doesn't actually want to take all their cash and tie it up in an unsecured loan especially since that can lead them to have to take Mark to Market write Downs on their earnings reports which leads to a lower earnings per share for the quarter and then that looks bad for the executive staff and it just looks like a bad deal all around and it's generally not something Banks want a lot of on the book anyway because it creates too much risk with the central banks and the central banks are like ah you know things go bad that loan could go bad and then now that adds to more stress at your bank and then if you're too big to fail we have to bail that out and we don't want to do that so we might tell you you have to get rid of that and if you have to get rid of that loan that you're holding well we don't really care what you have to sell it for just take a big loss and get rid of it okay so like long and short of it like the banks would probably love to bail on this equity or rather this debt financing commitment because they're going to lose probably more money than they're going to make on advisory fees the problem is they committed to this deal until October 20th now they could renege on that but that would slay probably at least slay their reputation on Wall Street it's like your commitment letter is basically now worthless because you just weasled out of it at the last minute so I think the banks are kind of on the hook with this one so I don't think that debt financing isn't going to get funded I actually think that debt financing is going to get funded uh the margin financing isn't an issue and so really the only potential loophole here is that something squirrely happens with that Equity financing commitment letter now the equity financing some of that money is coming from Elon Musk but some of that money is coming from other people like the following firms like Apollo Global Management Inc and 6th Street Partners had been in discussions to contribute billions of dollars via preferred Equity stake before musk declared the deal dead this is from Bloomberg musk had been looking to raise as much as six billion dollars from preferred Equity investors as a way to reduce the amount of cash he had to provide himself to do the deal in the transaction financing for the transaction includes about 13 billion dollars of debt led by Morgan Stanley we already talked about that part right now Reuters via Bloomberg is reporting that Apollo and 6th Street are no longer in talks with Elon Musk to provide financing for the deal there's talk on Wall Street that they were never even really interested from the get-go so maybe these two companies are just straight up clickbait trying to get their names in headlines and maybe these two companies didn't even matter from the get-go and that the other companies who are providing money for Elon stealer are actually still interested I don't know but it's possible that maybe some of those other companies aren't actually interested we'll see so now you've got a really interesting problem because you're sitting in this world where uh oh okay well the Dead financing is probably going to happen and quite frankly if Elon Musk wanted to like weasel out of this deal why would he make this commitment to do the deal 16 days before the debt financing offer would expire oh and the likely reason for that is the court date was set for October 17th and that is a trial date which means Elon Musk would have had to have gone through depositions before that trial date on the 17th then the trial date would have occurred and quite frankly as of October 5th here at 10 pm California time the Delaware Chancery Court on Wednesday said that neither side has yet asked to pause the case which is really interesting because then it makes you wonder what if this is all like a big charade like what if elon's like okay I'll keep going in with the deal and then even if you go to court on the 17th you know would would the court case be done within three days or could you in court say like hey your honor I said I'll complete the deal at full price you know we just need some more time Kick the Can down the road a week and now your debt financing expires boom one billion dollar termination walk away I don't know this is not as clear-cut and over as some folks are trying to make it seem remember if he cancels under either debt or Equity not being available it's a billion dollar termination fee and the benefit to this billion dollar termination fee is let's be real he probably saved like 20 billion dollars okay that's because on a price to sales multiple Twitter is selling for twice the sales ratio of Snapchat and Facebook twice the valuation on a price to sales basis and now if you go to price to earnings it's even worse I mean you're paying over 70 times 2022 earnings for this company when you have other companies like Google trading for 10 to 15 Apple trading around 30.
I mean even Tesla with what many think is a high valuation is trading for like you know 55 to 60 times earnings in 2022. Twitter's getting reamed here and it's not only well I mean Twitter would be getting reamed right like Windows valuation should be getting reamed but it's not only the fact that multiples have completely collapsed in the market but advertisers have pulled back a lot of money for not from advertising so earnings per share at Twitter are probably collapsing as well in fact their last quarter was terrible so elon's kind of overpaying for this deal and paying a billion dollar fine and I mean when I say he's kind of overpaying for the deal I should clarify that and say he's really really overpaying for the deal okay it's so bad it's so bad that you literally have Barons on the front page of Barons running Elon Musk is overpaying for Twitter by a huge amount here's the math okay so like don't just take my word for it to like do the math yourself and it's just like oh terrible so Elon would benefit from just walking away from this deal even if it cost him a billion dollars because a billion dollar loss would be a lot better than the loss in valuation he's going to suffer from for actually owning this company now the thesis is that hey well if he can you know incorporate this as part of his ex Holdings or maybe he as he's alluded to on Twitter he can create a future app like an x.com app or whatever that maybe it's like a WeChat or subscription and payment model and it's somewhat decentralized and it's got Free Speech but it's got public moderation for that you know whatever if he can do all those things and he can grow the user base to a billion users and and monetize it in a better way great but you still love a pain right now but don't change the fact that you're overpaying by a lot right now okay now is there the potential that any of this creates some more stress on Tesla stock and the reality is yes absolutely so first of all we know that Elon Musk needs to come up himself with approximately another two billion dollars so Elon musk's got to come up with an extra two billion dollars but we don't know the details of the equity financing agreement but if the top two are good let's say debt financing and margin financing let's say these are not considerations anymore but what if that Equity financing says that whatever he can't raise comes from Elon Musk well if Elon Musk is and ends up being five billion dollars short on Equity financing it's entirely possible Elon might have to sell another five billion dollars of Tesla stock which could create seven billion dollars of seven selling pressure on Tesla now a really dirty scenario could be what if they go to court and then the debt financing expires and then the judge says too bad you tried to play a game letting your debt financing expire I'm gonna make you come up with with the money anyway that could be another 13 billion dollars that Elon has to come up with that would just be like the worst possible potential scenario but could happen now those are short-term gyrations in in selling pressure in the future uh Tesla should go back to a more fundamental uh based valuation one that's not based on a fear over China or fear over you know deliveries and demand evaporating or fear over Elon selling which he could in theory through a 10b51 plan even through the lock-up period here or the blackout period before earnings uh they could have prescribed a plan for the selling this extra two bill right so yeah you absolutely potentially still have other dangers and risks coming for Tesla stock and a lot of it I think is going to hinge on is that extra Equity financing going to happen or can he somehow get things to delay to the point where the banks end up bailing on financing and then oops sorry we played the game waited 16 days here's your billion dollar cancellation goodbye you know if some of his Equity Partners don't come through because valuations went to poopy doopies and maybe they don't want to overpay either does that potentially mean more selling pressure on Tesla and the answer there is yes anyway thanks so much for watching folks and uh as usual we'll see in the next one and check out househack.com and invest with me if you're an accredited investor houseac.com just bring your invest ready letter remember that's househack.investready.com to get your letter and upload that at househack.com
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