Analysis: Musk rips buyout playbook with $46.5 billion in funding on Twitter


Tesla CEO Elon Musk speaks at an event in Hawthorne, California April 30, 2015. REUTERS/Patrick T. Fallon/File Photo

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April 22 (Reuters) – It is the biggest acquisition financing ever offered for one person. Elon Musk does it his way.

More than two-thirds of the $46.5 billion financial package Musk disclosed Thursday in support of his Twitter Inc (TWTR.N) bid would come from his assets, with the rest coming from bank loans secured by the assets of the social media platform. Read more

This is the reverse of how most investors structure buyouts, with debt secured by the target company’s assets typically making up the majority of the funding.

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Banks backing Musk’s bid have been reluctant to provide more Twitter-backed debt, arguing the San Francisco-based company wasn’t producing enough cash to justify it, people familiar with the matter said. Some banks also worried that financial regulators would reprimand them if they took on more risk, the sources added.

This will impact Musk’s returns, as secured debt against an acquired company can dramatically amplify earnings.

To double the $33.5 billion Musk is contributing from his own fortune to the buyout, Twitter’s value would need to increase 1.4 times. If he had invested just one-third of the deal’s consideration as equity, Twitter’s value would only have to increase 0.7 times for that money to double.

Additionally, Musk agreed to take out a risky $12.5 billion margin loan, secured by his shares of Tesla Inc (TSLA.O), the electric car maker he runs, to pay off part of the check. of $33.5 billion. If Tesla shares fell 40%, it would have to repay that loan, according to a regulatory filing.

Musk said last week he didn’t care “at all” about the economics of the deal and was going ahead with the acquisition because it was “extremely important to the future of civilization.”

“That seems consistent with what he said,” Columbia Law School professor Eric Talley said of Musk’s funding. He added that the structure of the proposed deal would make it difficult for many private equity firms to join Musk as capital partners, given that they typically rely on leveraged companies to boost their returns.

Musk did not respond to a request for comment.

Musk is the richest person in the world, with a net worth pegged by Forbes at $270 billion. Yet most of his wealth is tied to Tesla stock, and the proposed deal structure would dry up most of his available cash.

It had already borrowed against $88 billion worth of Tesla stock, and the proposed acquisition financing for Twitter would bring that figure to more than $150 billion, according to regulatory filings. That would leave him with little avenue to squeeze more money out of his Tesla stock in the short term, since Tesla executives can’t borrow more than 25% of the value of their pledged stock.

Musk’s loan against his Tesla stock to fund his Twitter bid is also costly, potentially costing him about $1 billion a year in interest and amortization costs, according to a regulatory filing. This encourages him to refinance the proposed debt package as soon as possible.

It’s unclear how much of the $21 billion in cash Musk has committed to the deal is immediately available to him, and whether he’s expected to cash out any of his assets. They include stakes in rocket maker SpaceX and tunneling startup Boring Co.

Twitter’s board plans to ask Musk to provide more details about the source of the money he promised to deliver, according to people familiar with the matter.

A Twitter spokesperson did not respond to a request for comment.

Musk has been looking for partners to reduce his capital contribution to the deal, one of the sources said. It is far from certain that such a partner will emerge.

SoftBank Group Corp (9984.T), one of the world’s biggest tech investors, which places big bets on companies and often doesn’t use a lot of debt, has decided not to sue Twitter, people familiar with the matter have said. the Japanese conglomerate. A SoftBank spokesperson declined to comment.

Thoma Bravo LP, a private equity firm that managed more than 0 billion in assets at the end of December, is in talks with Musk to join its bid, The New York Post reported Thursday. A person familiar with the matter, however, said Thoma Bravo had told Twitter that he was exploring a rival offer to challenge Musk, without joining him. A spokesperson for Thoma Bravo declined to comment.

Musk also hinted that he would move Twitter away from advertising, a prospect that has given some private equity firms pause, given that Twitter depends on it for the majority of its revenue.

Earlier this month, Musk tweeted that the company should generate more subscription revenue and rely less on advertising, because “corporate power to dictate policy is greatly increased if Twitter depends on ad money. to survive”. He then deleted that tweet.

Twitter’s board is preparing to reject Musk’s offer as too low by April 28, when the company is due to report its first quarter results, sources said.

Musk, who has amassed a more than 9% stake in Twitter, said Wednesday that he was considering taking the offer directly to Twitter shareholders with a tender offer. In this scenario, shareholders could not sell their shares, due to a poison pill adopted by Twitter, but they could register their support for Musk’s offer.

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Reporting by Krystal Hu in New York and Anirban Sen in Bengaluru Editing by Greg Roumeliotis and Bradley Perrett

Our standards: The Thomson Reuters Trust Principles.


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