Tesla Stock Is Pricing in $37 of Twitter Fear. Here’s How We Know.

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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 his deal for the social media company.

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. Tesla stock closed up about 0.6% Wednesday. Twitter stock, however, dropped 2.1%. The

S&P 500
and

Dow Jones Industrial Average
both rose about 0.2%. The difference between where Twitter closed and where Musk has agreed to buy it, or the deal spread, is now 12%.

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

Tesla stock rose even as the

Nasdaq Composite
dropped a little. One possible reason is that as odds for a completed Twitter deal fall, Tesla investors feel a little better. So credit some of Tesla’s move to Twitter’s drop.

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These moves came after Tesla shares plunged 12% Tuesday, but Twitter wasn’t responsible for all of that drop. The Nasdaq 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’s decline can be attributed to the overall market. That means Tesla stock now reflects about $37 of Twitter worries.

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.

Why are investors worried? 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.”

Expect an overhang on Tesla until the deal is done—or simply goes away.

Write to Al Root at [email protected]