meIf you want to know who has the richest man in the world on speed dial, then a Thursday’s regulatory filing Provide insight. Elon Musk announced the release of New Supporter Points $44 billion (£35.6 billion) Twitter takeoverincluding Oracle mogul Larry Ellison, the leading trading platform in the crypto market, Qatar’s sovereign wealth fund and a Saudi prince.
If this is the Tesla boss displaying his power grid, it was also an acknowledgment that – despite his last words to the contrary – the numbers behind his bold presentation matter. Discussing his presentation last month, Musk said, “I don’t care about economics at all.” For some of the biggest banks on Wall Street, and even Tesla shareholders Twitter users, and the economy is really very important.
The initial funding package behind the acquisition, which required shareholder approval, was initially divided into three components: $21 billion in equity, or Elon Musk’s own money. $12.5 billion in loans secured against Musk’s shares in Tesla, the electric car maker he runs; And another $13 billion in loans from a group of seven banks, secured against Twitter itself.
That changed on Thursday. According to a document filed with the US Securities and Exchange Commission (SEC), commitment to equity has risen to $27.25 billion, with the help of a group of 18 investors including Ellison ($1 billion), Binance trading platform ($500 million) and Qatar Holdings ($375). Million dollars), which is the investment arm of the Gulf state’s wealth fund. They are putting up $7.1 billion, plus a contribution from Saudi investor Prince Alwaleed bin Talal, who is also planning to put up his Twitter stake of $1.9 billion in the deal rather than cash it out.
As part of this cabinet reshuffle, the loans were secured against Musk’s 15.7% stake in Tesla It was halved to $6.25 billion. The bank loan obligation remains the same.
Musk’s comment about the economics of supply, in an interview at a TED conference in mid-April, came before hastily confirming the funding that had been raised for the acquisition. It was a move that impressed Twitter shareholders and the company’s board of directors, who accepted the bid days later. But the unusual nature of his comments belies the earnest nature of the Tesla magnate’s financial commitments. Some experts point to a high-risk structure, regardless of last week’s changes – and what that means for the company it’s buying.
“Musk didn’t provide many details about his business plan for the company,” says Jill Fish, professor of business law at the University of Pennsylvania. “Although he has taken steps to reduce risk by bringing in additional investors, he still has a lot of personal risk financially, he is paying a heavy price based on Twitter’s current business model and has large loans from banks. Given the scale of Musk’s personal financial exposure, It will be under pressure to run Twitter to make money, whether to manage its own financial risk or to repay bank funding.”
First, let’s take a look at Musk’s commitment. Last month he revealed that he had Sold $8.5 billion worth of shares in Tesla Since the acquisition was announced, likely to help fund the transaction. His stake in Tesla, which forms the core of his fortune, is an integral part of financing the deal. If it takes away new investors and Prince Tawaleed’s stake, as well as Musk’s $3.9 billion stake in Twitter, he still needs to provide about $14.3 billion in equity for the deal. The simple reading for this would be: He owns $155 billion in Tesla stock, so contributing just over $14 billion would be easy.
But it’s not that simple. According to a Securities and Exchange Commission filing, Musk has I already pledged 92.3 million of his 163 million Tesla shares “as collateral to secure certain personal indebtedness.” Then there is the $6.25 billion already pledged for the deal — in an arrangement known as a margin loan, in which the borrower may be required to make up for any shortfall in the value of the equity against which the debt is secured.
Assuming the 20% loan-to-value ratio in the original margin loan agreement is carried over, that means another 35.8 million shares are restricted. So, looking at Musk’s total contribution, that leaves him with about 35 million unrelated shares worth $30 billion. In theory, these could be pledged or sold to raise the remaining $14 billion in cash needed for the deal. But Musk tweeted on April 29 that he “has no plans for more TSLA sales anymore.”
Drew Pascarilla, senior lecturer in finance at Cornell University, says he would be surprised if Morgan Stanley, the Wall Street bank that has taken a leading role in debt financing, did not implement some form of due diligence on Musk’s commitment. “There is no way for Morgan Stanley to move forward like they did unless they look in Elon’s eyes and see some evidence that he can come up with that money.”
The Tesla CEO has other sources of wealth, including already sold Tesla stock, his SpaceX rocket business and the tunneling company Boring Company. He’s also willing to receive $20 billion in Tesla stock options (based on Friday’s share price), although he can’t cash out those options for five years.
According to the calculations of CreditSights, a credit research firm, bank funding alone will leave Twitter highly leveraged once the deal is complete. CreditSights says Twitter’s total indebtedness will be nine times its primary debt, Ebitda – a measure of profit – for 2021.
“This is too high and certainly not a comfortable amount of leverage,” says Jordan Chalvin, chief technology analyst at CreditSights. Against the background of these numbers, Musk put forward ideas such as charging for ‘minor’ fees For commercial and government users, although it will remain free for regular users The New York Times He also reported Friday that Musk expects to pay off debt interest costs of between $800 and $900 million with free cash flow expected to grow to $9.4 billion by 2028, although in the short term it looks like it will be tight. According to Chavlin, an agent of Twitter’s ability to cover the interest of its debt would subtract Twitter’s capital expenditure costs — $1 billion last year — from the company’s Ebitda. According to a Reuters poll, Twitter Ebitda stock market analysts forecast $1.4 billion in 2022 and $1.8 billion in 2023. That could come as a squeeze.
“The very high levels of debt Elon plans to persuade Twitter come with a high price — investing for growth,” says Cornel Pascarilla. “A tech company like Twitter needs to invest in itself to continue to innovate and grow. After the deal, most of Twitter’s cash flow will not be used not for investment, but for debt service.” Speaking of Twitter at a recent conference, Musk said, “I mean, I can afford it.” Technically speaking.” It can, but some users may have to pay.
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