You will have noticed that there were unlikely to be more offers, and the weakness of Meta and Netflix
You have to give Elon Musk credit: he gets things done. He not only raised the financing to buy Twitter in a matter of days, but he has convinced the firm to accept his offer in a short time, and for the original price.
When Musk made his offer, he lacked funding, and in 2018 he had mistakenly said he had the cash to acquire Tesla. In addition, Twitter was trading in the summer more than 25% above the offer price. So the council had reason to proceed cautiously. The normal thing would be to demand a higher price, look for other bidders or argue that the firm is worth more. Perhaps the board simply did a poor job of selling: it has failed to capitalize on its high profile, and it has been difficult to discern a clear strategy.
Meanwhile, Musk bolstered his offer with a financing package led by Morgan Stanley. And it could be that the board and the big shareholders realized that there were not a hundred birds flying. Musk’s likely return on investment is low. And, to date, there have been no other offers.
But the speed of capitulation is curious. Another factor could be that the quarterly results expected for tomorrow Thursday are disappointing. Some good ones would justify demanding a higher price or promoting an independent route. But Meta Platforms lost about a quarter of its value after posting unexpectedly weak growth earlier in the year, and Netflix just slumped further. Twitter’s rapid sale may simply mean that Musk is paying far more than anyone else would.
What have they been smoking at Morgan Stanley?
Has Morgan Stanley inhaled Musk’s favorite weed? It would be an explanation of the debt package that they have formed. But it seems more rational if you look through the smoke.
The aforementioned bank, among others, will lend Musk 12.5 billion guaranteed with his Tesla shares. The firm has also organized loans and a line of credit for 13,000 million with Bank of America or Barclays. It will have attracted attention on Wall Street. Twitter generated almost 1.5 billion ebitda in 2021, excluding a litigation agreement with shareholders. Buying Musk would increase the firm’s leverage to 8.6 times EBITDA, excluding cash on the balance sheet. The interest alone could cost €939 million a year, or two-thirds of EBITDA, depending on the terms of the package. That leaves banks with little protection if growth reverses. Such a scenario is very likely if Musk scares advertisers with his content plan.
A financial partner like Thoma Bravo could provide some reassurance, though it’s doubtful he’ll be able to contain the billionaire. A better reason for hope is that Musk has a lot at stake. Including the margin loan, which he will have to satisfy, or risk losing his Tesla shares, he is gambling up to 33.5 billion, three-quarters of the total. The average purchase in the US in 2021 was 58%, according to PitchBook.
Musk’s exposure is considerable, even for a man of his net worth, which Forbes estimates at $270 billion. That gives him a good reason to worry about the financial health of the firm, even if he says he doesn’t. If it continues to grow as analysts expect, leverage would drop to less than 7 times EBITDA by 2023.
To be sure, Morgan Stanley is also thinking about the big picture. Musk’s love of margin lending makes him an attractive private banking client. Pleasing him increases the chances of participating in future deals involving Tesla and Space X. Keeping the richest in a high mood is worth a little risk.
