Funding is far from secure.
Just like four years ago, when Elon Musk claimed he had ‘secured funding’ to delist electric car maker Tesla, the mercurial entrepreneur’s $43 billion bid to privatize Twitter will depend on whether it has the money to carry out its plan and can persuade the company’s board to go along with it.
Some Wall Street analysts have warned that Musk’s $54.20 per share offer may not satisfy Twitter’s board – his stock has traded above that level most days the month. last year. But assuming Musk is serious about pursuing his bid, Wall Street is watching closely to see how he can find the money to go through with his takeover of Twitter.
“The details of how Musk would finance the deal will determine the ramifications for Twitter,” said Moody’s analyst Neil Begley.
Musk pays personally
Musk could fund the deal using his own wealth. The South African-born executive, who often laments his lack of money, is worth more than $260 billion on paper, according to Forbes. This includes his stakes in Tesla and SpaceX.
Ratings agency Moody’s estimated on Thursday that Musk would need to cobble together $36 billion, less than the overall valuation of $43 billion, considering he already owns a 9% stake in Twitter as well as buybacks of the company’s own shares and additional cash. it has generated since the last tax return.
The easiest way to reach this sum would be to sell his shares in the companies he leads: Tesla and SpaceX. The downside, however, would be the heavy tax bill generated by these sales.
An alternative more widely discussed by bankers and private equity executives would be for Musk to pledge the shares he owns in Tesla in exchange for a multi-billion dollar loan.
The automaker limits the amount of loans senior executives can take out by pledging their shares to 25% of the value of an executive’s assets. This limit is intended to reduce the risk that a margin call will lead to a large sell-off in Tesla shares.
Filings with U.S. securities regulators show that Musk, who owns 172.6 million Tesla shares worth $170 billion, had already pledged 88.3 million shares last June for loans. If Musk didn’t repay those loans or recoup shares from previous pledges, company rules would limit another loan to about $21 billion.
Securing these loans is another matter. The volatility of Tesla shares would test the resolve of many risk managers on Wall Street, as would Musk’s run-ins with the Securities and Exchange Commission.
Banks may be wary of working with the billionaire, including JPMorgan Chase, which sued Musk late last year for $162 million over a fallout related to the automaker’s failed privatization in 2018.
“The noise of Elon Musk would be something we should think about,” said a private lender. “There’s a lot of volatility that comes with it.”
That hasn’t deterred Morgan Stanley, which advises Musk. Even though its balance sheet is smaller than that of rivals such as JPMorgan and Bank of America, it has already exploited its relationship with Japan’s Mitsubishi UFJ to fund huge loans, including $33.5 billion for the takeover by Bristol- Myers Squibb from rival Celgene in 2019, one of the biggest bridge loans on record.
Find friends full of money
Musk wouldn’t have to pay the entire multi-billion dollar check himself. Several private equity investors have expressed interest in backing it with both debt and equity. Advisers working with him rang the phones to try to work out who would be in line, a person with knowledge of the matter said.
The buyout groups are sitting on trillions of dollars, which makes financing the deal possible from a financial standpoint.
“Putting the drama of Elon Musk and Twitter aside, the fact that it is plausible that private credit could do this is a statement about the massive transformation that has taken place in capital markets,” said one. senior manager of a direct lender.
A second buyout group executive said he expects private lenders to be more willing to fund the deal, as banks likely have less risk tolerance to fund a takeover of this. cut. Banks would also come up against limits set by US financial regulators.
“Twitter based on net income loses a lot of money. The [public] the markets are only going to go so far on that,” they said.
Although Twitter has posted losses over the past two years and has questionable credit ratings, it has more cash than debt on its balance sheet. This opens the door for Musk to raise billions of dollars in debt for his takeover, reducing the amount of Tesla stock he will have to sell or use for personal loans to fund the deal.
Twitter is expected to generate $1.4 billion in earnings before interest, taxes, depreciation and amortization this year. “If you think Twitter can be run much more efficiently, you can add cost savings and get an Ebitda-based loan that makes sense,” the executive added.
Those numbers, tossed into conversations and written on notepads as investors tried to figure out a takeover on Thursday, are counting on Twitter to hit its growth targets. They also include an important assumption: that the cost of data center expansion and technology spending will not exceed the company’s already high $950 million forecast for 2022.
Buyout executives said they believe lenders would be willing to provide Musk — or another bidding party for Twitter — with more than $10 billion in debt, based on his earnings. In addition to the preferred stock, which pays a fixed dividend and would be superior to the common stock held by Musk, investors could provide about $5 billion more, they thought.
That capital would stretch Twitter’s finances, especially if senior debt is costing the company 6% or 7% interest per year. More junior preferred stocks could pay a dividend of 9-12% a year, according to estimates from a major lender that said it was ready to commit billions to a potential deal.
“The capital markets would finance him if he accepted [the right] amount of equity,” said a senior credit investor. “It could easily get $10 billion to $15 billion in funding.”
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