Twitter accepted Elon Musk’s $44 billion takeover bid on Monday, setting the stage for one of the largest tech acquisitions in history. But did the world’s richest man bite off more than he can chew?
Twitter may be a “public town square,” but it has struggled to earn consistent profits over the past few years, posting a net loss of $221 million in 2021, and $1.14 billion in 2020, SEC filings show.
The company also held over $4.2 billion in long-term debt at the end of 2021, and will be saddled with an additional $13 billion in debt if Musk’s acquisition goes through.
Potential interest rates on that debt, detailed in the letters of commitment from various banks, range from close to 6% to as high as 11%. That means Twitter will be faced with around $1 billion in annual interest payments if the Musk deal closes, according to calculations from Bloomberg’s Matt Levine.
Twitter’s cash flows—the money it takes in before accounting for interest, taxes, depreciation, and amortization—are projected to reach $1.43 billion by the end of 2022. At that level, the company will be forced to use the majority of its cash simply to service its debts.
Joshua White, an assistant professor of finance at Vanderbilt University and former economist at the U.S. Securities and Exchange Commission, told Fortune the deal will put Twitter’s ability to service its debts “in question” moving forward.
“I definitely think it’s significantly increasing the risk. And I expect analysts to downgrade Twitter’s debt because of that,” White said. A downgrade to Twitter’s debt would mean higher borrowing costs for the company moving forward, not to mention the negative press.
Multiple credit rating agencies have already said they are taking a second look at Twitter’s debt rating as the Musk acquisition pushes forward.
Moody’s said on Tuesday that its rating for Twitter, Ba2, which is just barely above a junk rating already, is under review due to the increasing debt burden of the social media giant. And S&P Global Ratings put its BB+ rating for Twitter on watch as well this week, noting that the Musk deal would push the company’s net leverage—a ratio of debt to earnings—past the 1.5 times threshold that would trigger a downgrade.
Scott Kessler, Global Sector Lead for Technology Media and Telecommunications at Third Bridge, a global research firm, told Fortune that Twitter’s current debt levels are “hardly unprecedented,” but noted that the recent addition of debt from the Musk takeover complicates the picture.
Kessler said he thinks Musk will likely cut the number of employees at Twitter, particular in the content moderation department, to improve the social media giant’s ability to service its debts. The Tesla CEO will also likely look to boost subscription revenue at the firm to help increase cash flow, according to Kessler, but that could take time, as Twitter gets roughly 90% of its revenues from advertising currently.
The Musk-Twitter deal just “wouldn’t make much sense to most private equity investors” due to Twitter’s unstable cash flows, Bloomberg reported this week, citing market participants. But Musk has said that he doesn’t care about the economics behind the acquisition.
Instead, the billionaire entrepreneur says he’s pursuing the takeover in order to protect Twitter’s role as a “platform for free speech around the world.”
“This is not a way to sort of make money,” Musk told Chris Anderson at a TED event on April 14. “My strong intuitive sense is that having a public platform that is maximally trusted and broadly inclusive is extremely important. So it’s about the future of civilization, but you don’t care about the economics at all.”
Musk personally took out a $12.5 billion margin loan to help finance his buyout, backing the move with $62.5 billion of his Tesla shares. Were Tesla’s stock to drop by 40%, Musk would have to pony up the cash to pay back the loan, according to regulatory filings.
That adds risk for Twitter, and for Tesla shareholders, White said.
“Because that collateral is underlying the margin loan, if something were to happen, and Twitter struggled to service the debt, or if Tesla stock price drops, then he could get a collateral call where he might have to sell shares of Tesla,” White said. “You could imagine a scenario where Tesla shares come down, and Elon has to sell more to maintain the margin loan.”
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