IIf you want to know who is the richest man in the world in speed dial, then a regulatory filing Thursday provided an overview. Elon Musk has announced around 20 new backers for his $44bn (£35.6bn) takeover of Twitter, including Oracle tycoon Larry Ellison, the crypto market’s leading trading platform , the Qatari sovereign wealth fund and a Saudi prince.
While this was the Tesla boss flaunting his power grid, it was also an admission that – despite recent talk to the contrary – the numbers behind his bold offer matter. Discussing his offer last month, Musk said, “I don’t care about the economy at all.” For some of Wall Street’s biggest banks, Tesla shareholders, and even Twitter users, the economy is very important indeed.
The seed funding behind the takeover, which requires shareholder approval, was initially split into three components: $21 billion in equity, or Elon Musk’s own cash; $12.5 billion in loans secured by Musk’s shares in Tesla, the electric car maker he runs; and another $13 billion in loans from a group of seven banks, guaranteed by Twitter itself.
That changed on Thursday. According to a filing with the U.S. Securities and Exchange Commission (SEC), equity exposure had risen to $27.25 billion, helped by a group of 18 investors including Ellison ($1 billion) , the Binance trading platform ($500 million) and Qatar Holding ($375 million), an investment arm of the Gulf state’s wealth fund. They are investing $7.1 billion, plus a contribution from Saudi investor Prince Alwaleed bin Talal, who also plans to incorporate his $1.9 billion Twitter stake into the deal rather than cash out .
As part of the shakeup, loans secured by Musk’s 15.7% stake in Tesla were cut in half to $6.25 billion. The bank loan commitment remains the same.
Musk’s comment on supply-side economics, in an interview at a TED talk in mid-April, came before he confirmed early funding for a takeover. It was a move that swayed Twitter shareholders and the company’s board, which accepted the offer days later. But the off-the-cuff nature of his comments belies the serious nature of the financial commitments the Tesla tycoon is making. Some experts point to a high-risk structure regardless of last week’s changes – and what that means for the company it buys.
“Musk didn’t provide many details about his business plan for the company,” says Jill Fisch, a business law professor at the University of Pennsylvania. “Although he has taken steps to reduce his risk by attracting additional investors, he still has a lot of personal financial exposure, he is paying a high price based on Twitter’s existing business model and he has large loans from Given the scale of Musk’s personal financial exposure, he will be under pressure to run Twitter to make money, both to manage his own financial risk and to repay bank funding.
Let’s take a look at Musk’s commitment first. Last month, he revealed he had sold $8.5 billion worth of Tesla stock since the takeover announcement, presumably to help fund the deal. His stake in Tesla, which forms the core of his wealth, is integral to financing the deal. If you eliminate new investors and Prince Talwaleed’s stake, as well as Musk’s $3.9 billion stake in Twitter, he still has to provide about $14.3 billion in equity for the deal. A simple reading of this would be: he owns $155 billion in Tesla stock, so contributing just over $14 billion should be easy.
But it’s not as simple as that. According to a filing with the SEC, Musk has already engaged 92.3 million of his 163 million Tesla shares as “collateral to secure certain personal debts.” Then there’s the $6.25 billion already pledged for the deal — under a deal known as a margin loan, where the borrower could be required to make up any shortfall in the value of the shares on which the debt is secured.
Assuming the 20% loan-to-value ratio in the original margin loan agreement is carried over, that means an additional 35.8 million shares are tied. So looking at Musk’s total shareholding, that leaves him with about 35 million unpledged shares worth $30 billion. In theory, these could be pledged or sold to raise the remaining $14 billion in cash needed for the transaction. But Musk tweeted on April 29 that he had “no further TSLA sales scheduled after today.”
Drew Pascarella, a lecturer in finance at Cornell University, says he would be surprised if Morgan Stanley, the Wall Street bank that played the lead role in the debt financing, hadn’t done some form of due diligence on Musk’s engagement. “There’s no way Morgan Stanley would have gone the way they did if they hadn’t looked into Elon’s eyes and seen evidence that he could find that money.”
The Tesla chief executive has other sources of wealth, including previously sold Tesla shares, his rocket company SpaceX and his tunneling company Boring Company. He’s also in line to receive $20 billion worth of Tesla stock options (based on Friday’s share price), though he can’t cash them in for five years.
According to calculations by CreditSights, a credit research firm, the bank financing alone will leave Twitter heavily indebted once the deal closes. Twitter’s gross debt will be nine times its underlying Ebitda – a measure of profit – for 2021, according to CreditSights.
“That’s very high and definitely not comfortable leverage,” says Jordan Chalfin, senior technology analyst at CreditSights. It’s against the backdrop of these numbers that Musk floated ideas such as charging a “light” fee for commercial and government users, though it’s still free for casual users. New York Times also reported Friday that Musk expects to repay the $800-900 million in interest on debt with free cash flow he expects to reach $9.4 billion by 2028, although ‘in the short term, it looks like it will be tight. According to Chaflin, one indicator of Twitter’s ability to service its debt interest would be to subtract Twitter’s investment costs — $1 billion last year — from the company’s Ebitda. Equity analyst forecasts for Twitter’s Ebitda, according to a Reuters poll, are $1.4 billion in 2022 and $1.8 billion in 2023. That could be a squeeze.
“The extremely high levels of debt that Elon plans to impose on Twitter come at a high price – an investment for growth,” says Cornell’s Pascarella. “A technology company like Twitter must invest in itself to continue to innovate and grow. After the deal, most of Twitter’s cash flow will not be used for investing, but for servicing debt. Speaking about Twitter at a recent conference, Musk said, “I mean, I could technically afford it. It can, but some users may have to pay.