This writer recently spoke to an individual familiar with the financing for Elon Musk’s $46.5 billion bid for Twitter. This person––a big Musk fan, by the way––noted that the renowned maverick is taking a highly unusual stance as a dealmaker, from eschewing due diligence to deploying leverage on a chronic under-performer so heavy that at least initially, its cash flow won’t cover its interest payments. The source highlighted several of the Musk-Twitter transaction’s characteristics that diverge from the Wall Street mainstream, to put it mildly, and emphasized what looks like the Tesla CEO’s ironclad determination to own Twitter, transform the platform to a fully-open public square, and make tons of money for himself and investors along the way.
Musk didn’t demand an inside look at Twitter’s books
Before signing the deal to purchase Twitter on April 25, Musk didn’t require the right to conduct the due diligence that’s customary in large acquisitions. Hence, he made his wager without examining Twitter’s internal customer-trend data and financial numbers not publicly disclosed. “He did the deal with no due diligence,” says the source. “On the one hand, that might sound crazy. But it’s a public company, so plenty of information was available. So it’s not insane, but it is extremely unusual.”
Musk is promising huge returns to investors
According to this individual, Musk has been pitching potential investors that he plans to take Twitter public around three years after the transaction closes, and that over the next half decade, he’ll multiple its initial equity value four to five fold. If he succeeds, Musk would mint money for himself and his backers. He’s forecasting that their starting stake of over $32 billion would mushroom to as much as $150 billion by around 2027. “Did Musk have the most fully baked plan in the world” for how he’d fix Twitter? asks this person rhetorically. “No. But he was pretty specific about the financial targets. He wants to make big money doing this.”
Musk is using heavy leverage
“Is it a lot of debt? No question about it,” notes the source. Twitter has a slim $1.5 billion in earnings before interest, taxes, depreciation and amortization (EBITDA), and its borrowing $13 billion from a consortium of lenders to help finance what’s known as “a leveraged take private” resembling an LBO. We discussed the numbers. Twitter is already carrying more than $6 billion in long-term debt and capital leases. The additional $13 billion in borrowings represents a “hefty” 8.7 times leverage (of debt to EBITDA). After interest and cash taxes, what Twitter has left over to pay extra interest is around $500 million a year. That’s less than the $600 million added load from the new loans. Put simply, Musk must rapidly improve Twitter’s operations to achieve growth revenues that’s much faster than the rise in expenses, the opposite of today’s trajectory. If that happens, the big leverage will magnify his partners’ gains; if he fails a huge portion of their equity will vanish.
Musk is looking to lower his equity exposure
As the source points out, the initial deal made Musk responsible for raising every dollar in equity beyond the $13 billion in debt. That could have meant putting up over $30 billion of his own cash––the most likely fount, of course, was selling and margining Tesla shares and vested options. But Musk’s been amazingly successful at recruiting investors to share the burden. He’s attracted a group of 19 investors as varied as Oracle’s Larry Ellison, Qatar’s sovereign wealth fund, and Silicon Valley’s Sequoia Capital for a total of $7.14 billion. He’s also reportedly in talks to raise billions more in preferred stock. The contributions from co-investors have enabled Musk to reduce what was announced as a $12.5 billion margin loan secured by Tesla’s stock by half, to $6.25 billion.
So far, Musk’s pocketed $8.4 billion in cash from selling Tesla shares in early May, funds most likely earmarked for the transaction. According to the source, Musk will still have “tens of billions of dollars in the deal,” but has significantly reduced his own cash contribution via his great success in marshaling big backers.
Musk has no intention of bailing
It would appear that sundry factors could prompt Musk to abandon the deal. If Tesla’s stock keeps falling, Musk could be forced to sell shares en masse to meet margin payments. By junking the transaction, he could remove that pressure. Or, Twitter’s business could deteriorate in the months it will take to win the regulatory approvals needed to close, convincing the gambler that his target is too broken to fix. If he exits, Musk must pay a $1 billion “breakup fee.” But the source says that the looming penalty has no bearing on the buyer’s determination to own Twitter: “Musk is a binary person. Sure, he could pay the $1 billion and walk away, thereby shedding tens of billions in equity exposure to Twitter. But I see no signs he’s remotely considering that course.”
Musk is winning backers for three possible reasons
The source said he’s been hearing three motives advanced for why big name co-investors are joining Musk, two from the partners themselves. The first, he says, amounts to an expression of gratitude by folks Musk helped make wildly rich, and funds that greatly raised their returns, via their stakes in Tesla. For example, longstanding Tesla shareholder and Musk booster Ron Baron can hardly be thrilled that Musk is pledging to run still another company as Tesla’s shares drop, yet a subsidiary of Baron Capital is putting $100 million in the deal. “A cynic might say that the only people coming into the common equity are people who owe Elon favors,” notes the source. A second reason advanced by funds Musk recruited: Twitter was “barely managed” under former CEO Jack Dorsey, who was criticized for traveling to such remote spots as Fiji while running the social media platform. “No one disputes that it was under-managed,” says the source. “So the idea is that given Musk’s operating skills, he can turn it around big time.”
The third explanation might be called the allure of pure genius. “The bullish case is that this is the greatest single moneymaker in our history, so I’ll back him because he can multiply the equity by four or five times,” says the person to whom I spoke. In this view, it’s not about the Twitter’s current numbers but a kind of unquestioned faith in a magician who since he’s achieved the seemingly impossible in building a key industry of the future from scratch, and making his stockholders, at one point, around $1 trillion in the process. If the cynics are right, some loyalists are repaying Musk by joining the zany Twitter adventure. Musk’s looked crazy before, and defied all odds. His backers are betting billions that he can epitomize the art of the possible once again.
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