Billionaire and Tesla boss Elon Musk announced last week that he wanted to buy Twitter. It already has a 9.2 percent share in the operator of the social network of the same name, making it its largest shareholder.
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More than two-thirds of the $ 46.5 billion (1.05 trillion crowns) package that Musk intends to buy a social network is his own money and assets. The rest would come from bank loans, which are secured by social network assets.
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This is the exact opposite of how investors make standard acquisition acquisitions. As a rule, most of the finances are loans secured by the assets of the company they intend to buy. Banks that provide money to Musk for the acquisition were reluctant to provide more money for a loan secured against Twitter, claiming that the social network does not generate sufficient cash flow, said people familiar with the acquisition.
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Uncertain returns
Banks that have already provided Musk with a loan also fear problems with financial regulators if they provide additional loans and thus take additional risk, sources have added. Although it might seem more advantageous for Muska to use his own money, loans secured against Twitter can significantly increase earnings.
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In order for Musk to double his $ 33.5 billion he offered to buy the company, the value of Twitter would have to increase 1.4 times. If his money accounted for only a third of his total acquisition, Twitter’s value would only have to increase 0.7 times to double his investment.
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What’s more, to pay off part of the investment, Musk took out a $ 12.5 billion risky loan secured by shares of his own Tesla to pay off part of the investment. If Tesla’s shares fell by 40 percent, he would have to repay the loan by law.
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For future civilization rather than business
Last week, the head of Tesla and SpaceX announced that he “didn’t care” about the economics of the acquisition and that he wanted to buy Twitter because it was “extremely important for future civilization.”
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“It sounds consistent with what he’s said in the past,” explains Eric Talley, a professor at Columbia Law School. According to him, the proposed structure of the transaction could prevent many private investment companies from joining Musk as joint-stock partners. They usually rely on corporate debt, which in turn increases their revenues. Musk did not respond to the agency’s request for a statement on the situation.
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According to Forbes magazine, Elon Musk is the richest man on the planet with a fortune of $ 270 billion, but most of his wealth lies in Tesla shares. The acquisition of Twitter would deprive him of most of the liquidity.
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So far, he has borrowed over $ 88 billion in loans secured by Tesla shares. Loans linked to the purchase of Twitter would push that amount to $ 150 billion, regulators report. In the foreseeable future, he would hardly get more money from Tesla, as Tesla’s managers cannot borrow more than 25 percent of the value of their pledged shares.
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Musk and his (un) friends
Regulators’ reports also show that Musk’s loan is expensive. It would potentially cost him $ 1 billion in interest and depreciation each year. Therefore, it would probably refinance its debt package at the earliest opportunity.
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At the same time, it is unclear how much of the $ 21 billion in cash Musk has set aside for the acquisition of Twitter is directly available and whether, for example, he would not have to sell part of his shares in SpaceX or the Boring Co. start-up.
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According to sources familiar with the transaction, the Twitter bureau plans to ask Muska for a more detailed description of how and where he intends to take the 21 billion in cash. A Twitter spokesman did not respond to the agency’s request for a comment.
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Musk is trying to find a partner for his acquisition, but it is far from certain that such a partner will appear, said a source familiar with the transaction. SoftBank Group, which often invests in the technology industry, has decided not to invest in the acquisition of Twitter, people close to the Japanese conglomerate said.
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The New York Post said private investment firm Thoma Bravo LP, which had more than $ 100 billion in assets under management at the end of December, had negotiated with Musk to join its bid. However, a person familiar with the matter said that Thoma Bravo indicated to Twitter that the company was examining a more competitive offer in which it would oppose it. He will not join his side. A spokesman for Thom Bravo declined to comment.
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Musk also suggested that Twitter should stop advertising. But this is a prospect that has suspended some private investment companies. Twitter relies on advertising for most of its revenue.
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Twitter intends to decline the offer
Earlier this month, Musk tweeted that the company should generate more subscription revenue and rely less on advertising because “the power of corporations to dictate politics will increase significantly if Twitter depends on advertising money to survive.” He later deleted this tweet.
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The board of Twitter is going to reject Musk’s offer as too low. According to Reuters sources, it wants to do so by April 28, when the company is to release a report with revenues for the first quarter of this year.
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Musk, which has so far amassed more than a 9 percent stake in Twitter, said on Wednesday that it was examining the possibility of handing over the offer directly to Twitter shareholders with a tender offer. In such a scenario, shareholders would not be able to sell their shares because of the “poison pill” that Twitter adopted, but they could register their support for Musk’s acquisition. The poison pill is a plan that would allow existing shareholders to buy shares at a significant discount to dilute the shares of new investors. The plan would come into force if one of the shareholders acquired more than 15 percent of the company in a transaction that was not approved by the board of directors.
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