Elon Musk’s takeover financing deal could clip Twitter’s wings

If you want to know who the world's richest man has on speed dial, then a regulatory filing on Thursday provided an insight. Elon Musk announced a score of new backers for his $44bn (£35.6bn) Twitter takeover, including Oracle tycoon Larry Ellison, the crypto market's leading trading platform, the Qatari sovereign wealth fund and a Saudi prince.

If this was Tesla's boss displaying his power network, it was also an admission that - despite recent words to the contrary - the numbers behind his audacious bid do matter. Discussing his offer last month, Musk said: "I don't care about the economics at all." For some of Wall Street's biggest banks, Tesla's shareholders and even Twitter users, the economics are very important indeed.

The initial funding package behind the takeover, which requires shareholder approval,was initially split into three elements: $21bn in equity, or Elon Musk's own cash; $12.5bn of loans secured against Musk's shares in Tesla, the electric carmaker that he runs; and a further $13bn in loans from a group of seven banks, secured against Twitter itself.

That changed on Thursday. According to a filing with the US Securities and Exchange Commission (SEC), the equity commitment had risen to $27.25bn, helped by a group of 18 investors including Ellison ($1bn), the Binance trading platform ($500m) and Qatar Holding ($375m), an investment arm of the Gulf state's wealth fund. They are putting in $7.1bn, plus a contribution from the Saudi Arabian investor Prince Alwaleed bin Talal, who also plans to roll his $1.9bn Twitter stake into the deal rather than cashing out.

As part of this reshuffle, the loans secured against Musk's 15.7% stake in Tesla have been halved to $6.25bn. The bank loan commitment stays the same.

Musk's comment about the economics of the bid, in an interview at a TED conference in mid-April, came before he confirmed hastily put-together funding for a takeover. It was a move that swayed shareholders in Twitter and the company's board, who accepted the bid days later. But the off-the-cuff nature of his comments belie 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 it means for the company he is buying.

"Musk hasn't provided a lot of detail about his business plan for the company," says Jill Fisch, a professor of business law at the University of Pennsylvania. "Although he has taken steps to reduce his risk by bringing in additional investors, he still has a lot of personal exposure financially, he is paying a high price based on Twitter's existing business model and he has large loans from the banks. Given the size 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 the bank financing."

First, let's look at Musk's commitment. Last month he revealed he had sold $8.5bn worth of shares in Tesla since announcing the takeover, 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 strip out new investors and Prince Talwaleed's stake, plus Musk's own $3.9bn stake in Twitter, he still needs to provide around $14.3bn of equity for the deal. A simple reading of this would be: he owns $155bn in Tesla shares, so contributing just over $14bn should be easy.

But it is not quite as straightforward as that. According to a filing with the SEC, Musk has already pledged 92.3m of his 163m Tesla shares as "collateral to secure certain personal indebtedness". Then there is the $6.25bn already pledged for the deal - in an arrangement known as a margin loan, where the borrower could be required to make good any shortfall in the value of the shares that the debt is secured against.

Presuming the loan-to-value ratio of 20% in the original margin loan agreement is carried over, this means a further 35.8m shares are tied up. So, looking at Musk's total shareholding, this leaves him with about 35m unpledged shares worth $30bn. In theory, these could be pledged or sold to raise the remaining $14bn of cash needed for the deal. But Musk tweeted on 29 April that he had "No further TSLA sales planned after today".

Drew Pascarella, a senior lecturer of finance at Cornell University, says he would be surprised if Morgan Stanley, the Wall Street bank that has played the lead role in the debt financing, had not carried out some form of due diligence on Musk's commitment. "There is no way Morgan Stanley would have proceeded as they did unless they had looked in Elon's eyes and seen some evidence that he could come up with that money."

The Tesla chief executive has other sources of wealth, including Tesla shares already sold, his SpaceX rocket business and his Boring Company tunnelling firm. He is also in line to receive $20bn worth of Tesla share options (based on Friday's share price), although he cannot cash these in for five years.

According to calculations by CreditSights, a credit research firm, the bank financing alone will leave Twitter highly leveraged once the deal is completed. Twitter's gross indebtedness will be nine times its underlying Ebitda - a measure of profit - for 2021, says CreditSights.

"That is very high and certainly not a comfortable amount of leverage," says Jordan Chalfin, a senior technology analyst at CreditSights. It is against the backdrop of these numbers that Musk has floated ideas such as charging a "slight" fee for commercial and government users, although it will stay free for casual users.The New York Times also reported on Friday that Musk expects to pay down the $800m-$900m debt interest costs with free cash flow that he expects to grow to $9.4bn by 2028, although in the short term it looks like it will be tight. According to Chaflin, a proxy for Twitter's ability to cover its debt interest would be subtracting Twitter's capital expenditure costs - $1bn last year - from the company's Ebitda. Stock market analysts' forecasts for Twitter Ebitda, according to a Reuters poll, is $1.4bn in 2022 and $1.8bn in 2023. It could be a squeeze.

"The extremely high levels of debt Elon plans to saddle Twitter with come at a high price - investment for growth," says Cornell's Pascarella. "A technology company like Twitter needs to invest in itself to continue to innovate and grow. Post deal, most of Twitter's cash flow will be used not for investment, but to service debt."Speaking about Twitter at a recent conference, Musk said: "I mean, I could technically afford it." He can, but some users might have to pay.