Elon Musk must be one heck of a salesman.
The Tesla CEO is leading the buyout of Twitter by offering a huge price of $44 billion, or $54.20 a share, almost 40% more than the social media’s giant fetched before he appeared, and the stock market started tumbling. Musk made his move just days before Twitter delivered a first-quarter earnings report widely expected to be dreadful—and likely to send its stock still lower—and news proved true to form. Twitter is bleeding cash. Its expenses are far outpacing its revenues, and its user growth constantly undershoots expectations. Yet Musk has somehow persuaded a roster of the world’s most prominent investors to join him in paying a superrich price for what looks like a dog. Top example: the wooing of a longstanding Twitter shareholder, Prince Alwaleed bin Talal, the fabled Saudi billionaire.
Musk converts the doubtful prince
It took just three weeks for Musk to convert the prince from staunch foe to firm ally. When Musk unveiled his offer in mid-April, Alwaleed riposted on Twitter, “I don’t believe the proposed offer comes close to the intrinsic value of Twitter. Being one of the largest & long-term shareholders of Twitter, I reject this offer.” But on May 6, Alwaleed linked arms with Musk, tweeting, “It’s great to connect with you my ‘new’ friend, you will be an excellent leader for Twitter to maximize and propel its great potential.” Amazingly, instead of cashing in his almost 35 million shares, representing 4.57% of the total, for a princely take of $1.9 billion, Alwaleed declared that he’ll effectively roll all of his winnings into stock at the newly privatized, Musk-controlled Twitter.
Prince Alwaleed is the founder and 95% owner of Kingdom Holding, a Riyadh-based conglomerate that owns big positions in a wide variety of industries and regions. He rose to prominence in 1991 by providing a big private investment that rescued then-ailing Citigroup, still a staple in his portfolio. Alwaleed’s empire—he invests both via Kingdom and his own name—encompasses major stakes in Lyft, Snapchat, and Saudi petrochemicals giant Tasnee. He scored a coup early this year by selling a one-quarter interest in hotel operator Four Seasons to Bill Gates’ Cascade group for $2.2 billion, while retaining a large minority share. Among his trophies is the Arab world’s biggest record label, Rotana Music. Last year, Warner Music became Alwaleed’s partner by purchasing a 20% interest.
The prince is renowned for seeking friendly investments and dislikes when activists levy such demands as instituting big buybacks against the will of management and shedding businesses the leaders deem crucial to their strategy. A decade ago, he invested $300 million in Twitter when it was still private, and by all reports has proven a patient, quiet shareholder. We don’t know how Musk persuaded Alwaleed to flip and embrace his plan. But reviewing the deal’s terms, and especially how its LBO-like leverage could magnify returns to equity holders, provides some hints.
Leverage would give Alwaleed a bigger part of Twitter
In public filings, Musk and his bankers promise to provide a total of $46.5 billion to finance the deal. (You can read Fortune’s inside tale of how the deal came together here.) The total comes in three big chunks: $13 billion in term, bridge, and other loans provided by a group of eight banks; $27.25 billion in cash to be furnished from Musk’s personal fortune and raised from fellow investors; and $6.25 billion from a margin loan to Musk secured by $31 billion in Tesla stock. (The original amount of the margin credit was $12.5 billion, but Musk was able to reduce the amount by half through recruiting backers.) The $46.5 billion total is higher than the widely reported purchase price of roughly $44 billion. The difference appears to be extra payment for options and other equity instruments held by management that would swell the final price. This is a leveraged “go private” transaction, in which Musk is piling $13 billion in new debt on Twitter’s balance sheet to help finance the deal. The equity portion of the $46.5 billion being raised is hence about $33 billion. That’s the $6.5 billion from Musk’s margin loan plus the $27-billion-plus in cash from the EV titan and partners. (Although Musk is borrowing the money for the margin loan personally, it’s padding his equity ownership in Twitter.)
Since debt is financing nearly 30% of the buyout, the investors are getting outsize chunks of equity for the dollars they pledge. That benefit might allay Alwaleed’s fears that he’s now buying in at a price much higher than before Musk made his bid, when he could be grabbing a safe bundle of cash. The prince’s $1.9 billion stake at $54.20 a share will buy 5.65% of Twitter. That’s almost one-quarter more than his current 4.57% holding. Sure, he’s risking his big gain by rolling his stock back into Twitter at Musk’s high price. But Musk is reportedly telling potential investors that he’ll double or triple Twitter’s revenues in the next couple of years, then take his remodeled vehicle public. Alwaleed clearly thinks that Musk will drive Twitter’s stock far above the $54.20 that previously looked like a king’s ransom. If that happens, the prince will get an added boost from a piece of the equity that, courtesy of all that leverage, is fatter than his previous slice.
The pied piper lures more prestigious followers
The deal’s component still getting filled is that $27.25 billion in cash. It appears certain that if the deal happens, Musk and Alwaleed will be Twitter’s two biggest shareholders. Alwaleed will hold nearly 6% of the equity. What about Musk? We can’t yet calculate his total portion. But we can get close: The 9.2% bought before he announced his bid will translate into a roughly 11% share when the transaction closes, the bump coming through leverage. His $6.25 billion margin loan will bag another 18.7% of the $33.5 billion in equity. Here’s the unknown part. Over two days in early May, Musk sold $8.5 billion in Tesla’s shares. It’s a good bet those proceeds all go into Twitter shares, adding another 25%. That would bring his total equity position to 55%. He and Alwaleed combined would own around 60% of Twitter.
Musk has also amassed an additional $7.14 billion toward the $27.25 billion cash, non-margin-financed contribution from 20 big investors, including Oracle’s Larry Ellison ($1 billion), Silicon Valley’s Sequoia and cryptocurrency exchange Binance ($500 million each). Keep in mind that Musk is effectively adding $4 billion toward the $27.25 billion in cash by leaving the “proceeds” from the “sale” of his own 9.2% stake in Twitter. So add together the $4 billion, the $8.5 billion he’ll most likely use from his big Tesla dump, Alwaleed’s $1.9 billion, and the $7.1 billion from outsiders, and you get $21.5 billion. Musk’s still over $5 billion short on the cash end.
But the salesman’s hard at work. A recent filing disclosed that he’s talking to Twitter cofounder and former CEO Jack Dorsey about contributing his shares, now worth $925 million, up substantially thanks to Musk’s offer. Several other big shareholders are also getting the maestro’s pitch.
The big question is why any smart investor would buy shares in this fading, money-crunching enterprise that’s suffered a negative $620 million in free cash flow over the past four quarters. Keep in mind that the deal will pile a new heap of $13 billion on Twitter’s balance sheet at floating rates in a time of fast-rising yields, adding something like $650 million interest expense just to start. The cratering in stocks, with tech doing worst, suggests that Twitter’s shares would be selling much lower than their price of $48 on May 9, and probably the $39 pre-Musk quote, were it not for his surprise offer. The current price, however, is far from the $54.20 bid, indicating strong skepticism the daring deal will happen.
In fact, Musk’s banks and investors might demand that he renegotiate at a lower price. A flock of short-sellers, including Hindenberg Research, are pushing for that outcome. Since Twitter’s shares could collapse if Musk retreats, its board would be under intense pressure to accept a lower number. This horrible environment could prod his investors to recognize the obvious, that Musk’s offer was much too rich before the current near market crash, and looks particularly fanciful now. Musk may aim his next charm offensive at persuading the Twitter board to trade a pennies-from-heaven windfall for a much cheaper deal. It may be the slick master’s toughest sale yet.
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