Apr 25, 2022
Musk is wrong for Twitter even if deal math works out
Musk's Twitter financing plan raises questions about Tesla stake
It looks as if Twitter Inc. will sell itself to Elon Musk for US$43 billion, which would make the deal one of the largest leveraged buyouts in Wall Street history and give Tesla Inc.’s steward a powerful social media perch.
The math is sketchy, however, as are Musk’s intentions. Both of those factors promise to make this deal a potential train wreck and will force investors, managers, users and society to think more clearly and seriously about the role that social media companies play in an era scarred by viral propaganda and misinformation.
LBOs typically involve taking publicly traded companies private by piling debt on them and using their cash flow to pay down those obligations. Along the way, the firms that take over the companies are meant to make their targets more competitive and innovative. That’s the theory, anyway. The buyout wave that began in the 1980s and crested in 2007 was littered with deals gone awry. The LBO landscape grew quieter after the 2008 financial crisis, but handsome returns for investors and low interest rates caused transactions to reach new heights in recent years. If Musk snares Twitter, it will inevitably become a marquee case study of the efficacy of LBOs.
Of course, Musk’s presence means the buyout isn’t just one thing, so let’s examine the math. Musk says he’s pledging US$21 billion of his own money and will presumably sell a chunk of Tesla stock to raise those funds. Banks are going to lend him US$12.5 billion, secured by an additional US$62.5 billion of his Tesla shares. The rest of the purchase price and other costs will be funded by US$13 billion in debt that Twitter will take on. Read my colleague Matt Levine for a more detailed accounting, but at the end of the day Twitter will have about US$1 billion in interest payments due annually.
Maybe that will be manageable? It’s a close call. Twitter’s projected cash flows (the money it hauls in before accounting for interest, taxes, depreciation and amortization) are projected to be about US$1.43 billion this year and US$1.85 billion in 2023. So debt payments will consume a huge chunk of Twitter’s cash flow. Homeowners underwater on a big mortgage and related interest payments will be able to sympathize with the financial corner in which Musk may be putting Twitter. Musk is going to have about US$1 billion in interest payments to make, too, and if Tesla’s shares hit rough waters he could get squeezed, but let’s leave his wallet out of the mix for now. Twitter itself is going to have to churn at full throttle to earn the kind of money it needs to be both profitable and self-sufficient.
So there’s going to be pressure on Musk to make the financials work. He is said to have grand plans for doing that, which thus far seems to amount to an undisclosed deck he recently showed his backers. But he also said he isn’t interested in Twitter for economic reasons, which gave some potential financiers pause. The deal “wouldn’t make much sense to most private equity investors,” according to Bloomberg News.
But Musk swayed Morgan Stanley, Bank of America Corp., Barclays Plc and other big players, in part because of what Bloomberg News described as his “enthusiasm for the deal.” Enthusiasm only gets you so far, but big institutions such as Morgan Stanley have presumably done their due diligence. Or perhaps they also want to stay in Musk’s good graces so they can be well-positioned to get deal flow from Tesla? Maybe a bit of both? Time will tell. Investors expressed some optimism, lifting the stock price more than 3 per cent on Monday, though it is still below the US$54.20-a-share offer price.
Musk still hasn’t provided meaningful details about what, exactly, he will do to rev up Twitter’s engines. He has been an effective and bold leader at Tesla — but Tesla makes electric vehicles; it’s not a media company. Managerial prowess often doesn’t translate across different types of businesses. And media companies have found the digital era challenging, with advertising evaporating or finding new channels and subscription revenue difficult to corral.
Media companies also provide a public service. In an ideal world, responsible media companies keep users informed, monitor how power is used and how society evolves and provide forums for ideas. Musk has used social media to play games with his business interests, troll those he doesn’t like and run afoul of the law and regulators. None of that is a recipe for enlightened media management. As we’ve also learned from Facebook’s and Twitter’s myriad travails monitoring propaganda and disinformation, social media companies need to do a better job of vetting the information on their platforms. Musk shows no sign of being up to that task.
Yes, it’s compelling to watch Musk do his thing and interesting (and often disturbing) to see how much he breaks along the way, but media companies matter. They shape public dialogue and private conversations. And the price of buffoonery and delinquency is greater than US$43 billion.