Telefonica Chairman's M&A Ambitions Face Old Debt Challenges
Telefonica SA 's new chairman is running into an old problem. After the better part of a decade focused on cutting debt, the company still doesn't have the cash it needs to chase deals and growth.
The Spanish phone carrier is looking for diverse ways to simplify its structure by buying out partners in joint ventures and reorganizing certain operations to make itself more flexible for potential deals in the European telecommunications industry. Executive Chairman Marc Murtra, who took over in January, has ordered a strategic review to be unveiled in the second half of the year.
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Forbes
an hour ago
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Does Elon Musk's Borrowing Show A Super Low Tesla Stock Valuation?
CANNES, FRANCE - JUNE 19: Elon Musk attends 'Exploring the New Frontiers of Innovation: Mark Read in ... More Conversation with Elon Musk' session during the Cannes Lions International Festival Of Creativity 2024 - Day Three on June 19, 2024 in Cannes, France. (Photo by) A practice of Elon Musk and Tesla's board raises questions about the company's governance and the possible low valuation that private capital markets are putting on its shares. At the heart of the issue is how the company's CEO borrows money and whether he pledged an astoundingly large percentage of his shares — close to 7% of all outstanding stock — as collateral for a sum under 4% of the market value. The question is also not just about Tesla, but all public companies where executives and directors might pledge stock for borrowing in ways that could affect the market caps of the corporations. Because this has been a potential and actual problem across companies over time. Chief executive officers often borrow money against their shares as a tax-avoidance measure. Borrowing doesn't typically trigger income recognition requirements, so it is a mechanism for gaining liquidity without causing a taxable event. The interest paid on the loan is likely far less than the capital gains tax that would otherwise be required. Boards accept the approach for two major reasons. Generally, stock is considered to be a way to 'align the interests, ' as typically put, of executives and shareholders. But executives don't want to sit on shares without access to their value. Stock as collateral offers a balance. The other reason is to avoid a company's leader dumping shares. Such a situation could affect the stock's price, both because of supply and demand, and also from the psychological impact of an assumed loss of confidence by leadership. However, a problem appears if the market value of the shares falls and the lender makes a margin call in which the borrower must increase the amount of collateral against the loan, whether that is more shares, other assets of value, or cash. The board won't want a large sale of shares because of the effect on the overall stock price, and yet they may also be concerned about the executive tying up even more shares as collateral. In 2016, The Wall Street Journal wrote about margin debt on company stock held by the CEO of trucking firm Swift Transportation. A share price downturn in 2015 left him with margin calls, some of which he met by pledging more company shares. The board had to raise its limits on pledging multiple times and approved a stock buyback to raise share prices as part of the response. The CEO had pledged what was a quarter of all outstanding shares. Sumner Redstone sold 20% of his stake in Viacom and CBS in late 2008 to meet margin calls. Aubrey McClendon, founder and former CEO of Chesapeake Energy, had to sell 94% of his shares to cover loans. In 2015, Goldman Sachs called in $100 million of share-backed loans to Valeant's CEO, the Journal separately reported. Business Insider in 2022 wrote about 'cash-poor but equity-rich tech founders' who borrowed heavily and then faced a stock plunge. They mentioned eight such people who pledged more than 10% of their stakes and then were hurt by falling share prices. The potential for an executive to get caught out by falling share prices and the need to backstop collateral for loans they've taken is broader than one might think. Michael Chadwick of Fiscal Wisdom Wealth Management says that many corporate executives amass an overconcentration in their companies' shares. 'We have a [client] who's a director for a big pharmaceutical company,' Chadwick says. The person bought a house and got a loan from a non-bank lending company with his shares as collateral. Now the share price is down sharply, and he received a margin call. Tesla's stock plunged about 8.5% by 2:20 p.m. on Thursday. As Forbes reported, this seems to be a result of the relationship between Must and President Donald Trump appearing to unravel, with each attacking the other. The Tesla 10-K for fiscal year 2024 cites Musk's borrowing as one of its risk factors: 'If Elon Musk were forced to sell shares of our common stock, either that he has pledged to secure certain personal loan obligations, or in satisfaction of other obligations, such sales could cause our stock price to decline.' In the eyes of some, that might not be enough. 'The valuation issue is a really important one,' says Nell Minow, an expert in corporate governance and chair of ValueEdge Advisors, an institutional investor advisory firm. 'Were representations made to the lenders contrary to what is being told to the shareholders?' She adds that 'stock valuations should recognize any restrictions on a significant portion of the stock.' And the amount of collateral that lenders, including big banks, want could be an indicator of concern over the stability of share prices, the direction of the company, and how much they can trust the CEO. Page 20 of Tesla's 10-K/A, filed January 30, 2025, for the company's fiscal year that ended December 31, 2024, explains the board's rules for 'directors and executive officers to pledge Tesla stock for personal loans and investments' as something 'inherently related to their compensation due to our use of equity awards and promotion of long-termism and an ownership culture.' Directors and executive officers can pledge stock (not including warrants, options, restricted stock units, or other rights to purchase stock) as loan or investment collateral. Everyone other than the CEO is limited to borrowing no more than 15% of the total value of the pledged stock. Musk, by name, has a more complex limitation: the lesser of $3.5 billion or 25% of the total value of the pledged stock. 'It's an area where boards play a critical role, because there aren't any laws or rules that regulate pledging of shares by CEOs,' says Larry Cunningham, director of the Weinberg Center for Corporate Governance at the University of Delaware. 'All the rules that exist are disclosure rules. The SEC requires companies to disclose information about a CEO pledging shares.' Tesla's board explicitly notes on page 21 that 'such pledging does not indicate the extent to which there may be actual borrowings against such shares as of such date, which may be substantially less than the value of the shares pledged.' The total amount collateralized by all directors and officers 'was less than 1% of the total value of the pledged shares.' According to Tesla public documents, the company's management 'monitors compliance with the policy by regularly reviewing and requesting updates from the applicable director or executive officer on his or her pledged stock amount and loan amount.' Then, 'if necessary,' management reports to the board or its committees the extent of pledging. 'We believe that this monitoring is effective and includes appropriate controls, and we have confirmed that each of our directors and executive officers who have pledged stock are and have been compliant with this policy since our last confirmation,' they further said. Tesla did not respond to multiple requests for more insight into the situation. Also, PwC, the audit firm involved with the 10-K, said that it doesn't comment on organizations or clients. On page 23 is the list of beneficial owner names with at least 5% of shares, as well as named executive officers and directors, who may have less than 1%. As of December 31, 2024, Musk owned 714,754,706 shares, or 20.3% of all shares. That includes 410,794,076 shares in the Elon Musk Revocable Trust dated July 22, 2003, and 303,960,630 issuable on exercise of options within 60 days after December 31, 2024. As of then, all of the shares that Musk owned outright were in that revocable trust. They include 235,998,721 shares pledged against his personal loans. The opening value Tesla shares on Tuesday, May 27, 2025, was $347.35. The value of the shares pledged is $81.97 billion. Round it to $82 billion. A quarter of that amount is $20.5 billion. According to the board's rule, Musk can have borrowed no more than $3.5 billion against all that stock, or 4.3% of the shares' total value. Furthermore, the shares he's pledged are 6.7% of all Tesla shares. If the board approved the borrowing because the loaned amount was far lower than the value of the shares, the question of potential impact on the valuation of the company's market cap remains. Not just for Tesla, but any company whose executives could pledge significant amounts of stock for low valuations. 'Banks typically require 50-70% loan-to-value ratios on stock collateral, with daily mark-to-market,' says Giacomo Santangelo, a senior lecturer in economics at Fordham University. 'A 20% stock decline on a 60% loan-to-value loan means the borrower must immediately post additional collateral or face forced liquidation. This creates cascade risk, where small declines trigger margin calls, forcing either more pledging or open-market sales, putting more pressure on the stock.' Santangelo adds that from a share valuation perspective, 'traditional models miss this entirely' as they typically assume continuous liquidity. 'But pledged shares behave more like restricted stock with embedded put options held by creditors,' meaning there are two constraints. One is on the shareholder's ability to turn the shares into cash through a sale. The other is of a potential forced sale. Depending on the circumstances, banks can look for other assets, whether securities, real estate, cash, or even alternative assets like art. If an executive is caught on a margin call from borrowing, where the equity of the stock pledge is worth less than a set baseline, the person will have to pony up more cash, offer alternative assets, or sell off additional shares to cover the balance. This can happen when a stock's price drops. Tesla has seen downward pressures on its shares. As Yahoo Finance reported, Tesla electric vehicle registrations (a proxy for sales) were down 49% year-over-year in Europe even as overall EV registrations were up 34.1%. Citi Analyst Jeff Chung noted that recent sales in China were down about 16% year over year, as Barron's reported. Shares did jump on Tuesday, May 27, on Musk saying that he would return to the office rather than spending more time in politics. In 2022, Forbes reported that out of the Forbes 400 list of 2021, 32 billionaires pledged shares of public companies listed on the New York Stock Exchange or Nasdaq where they were either directors or significant shareholders (at least 5% of total shares of a company). Musk reportedly pledged a greater amount than the other 31 billionaires combined. He was fueling business deals like the Twitter takeover. According to that Forbes report, he pledged $62.5 billion in Tesla stock as collateral for margin loans of $12.5 billion. In the 2022 proxy statement, the board wrote that it limited loans with stock collateral to 25% of the pledged stocks. 'We believe this cap places sufficient limitation on any potential risk attendant to pledging stock, while still allowing flexibility in the use of equity awards to promote long-termism and ownership culture,' they wrote at the time. Also, the statement noted that a proxy advisory firm had 'concerns about the Board's risk oversight with respect to Tesla's policy regarding pledging of shares by directors and officers.' The proxy advisory was also concerned over 'hypotheticals of increasing share pledges.' In 2023, the board added the $3.5 billion cap to Musk's borrowing. Whether that applied in retrospect is unclear. If so, it would suggest that Musk had to repay a massive sum to keep within the new bounds. There seems to be nothing to indicate that his previous borrowing was grandfathered. If it were, there should be some documentation to that effect. Had he repaid that money, it would seem unlikely that vast number of shares would still be pledged. If he did repay the previous amounts, then under the Board's rules, the value of the shares to the maximum he could borrow, $3.5 billion, would be a roughly 23-times collateral coverage. According to Santangelo, that would signal that the lender saw an extreme risk in the pledged shares. What is clear is that in 2023, Musk had 238,441,261 shares pledged — 2,442,540 shares more than in 2024. That was a big jump from 2022, when Musk had pledged 92,331,125 shares, just under 39% of the 2023 figure. Also, the total shares he had in 2022 was 172,608,251, 21.2% of the total shares. There a large increase in the total number of shares as well, from 1,033,507,611 in 2022 to 3,164,102,701 in 2023. 'The whole point of caring about how much stock the executives and directors have is so investors can assess how well the interests of insiders align with theirs,' Minow says. 'Using stock as collateral arguably provides even more of an incentive to keep the price up, unless, as apparent in the Twitter purchase, the board is willing to open the spigot to make up for any squeezes.'
