Elon Musk eyes an escape from the trap that has cost him billions

Elon Musk may be on the verge of a Houdini-like escape from the financial morass that was his $US44 billion ($69 billion) acquisition of Twitter.

According to Bloomberg, Musk is seeking to raise new equity for the social media platform now known as X, at a valuation of … $US44 billion.

At face value, that would appear delusional.

There have been reports Elon Musk has been transferring cash from his other businesses to keep X afloat.Credit: Reuters

Since Musk acquired Twitter in October 2022, its revenues have plummeted as mainstream advertisers fled a platform that Musk – a self-proclaimed free speech absolutist – quickly reopened to previously banned users, allowing racist, homophobic, transphobic posts and hate speech and disinformation to flood in.

Only last month, according to The Wall Street Journal, Musk, in an email to X employees while highlighting the platform’s growing influence and power, said the company’s finances remained problematic.

“Our user growth is stagnant, revenue is unimpressive, and we’re barely breaking even,” he is reported to have written.

When Musk and a small consortium of equity investors who contributed about $US7 billion to the deal acquired Twitter, it had revenue of about $US4.5 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) of about $US682 million.

Last year, revenue was only about $US2.7 billion, but after Musk cut Twitter’s headcount by 80 per cent, EBITDA was about $US1.25 billion.

While that might appear to be a big earnings improvement, it needed to be.

The interest bill on the $US12.5 billion of debt Musk took on to buy the site would absorb almost all, if not all, of the cash the platform is generating. Indeed, there have been reports that Musk has been transferring cash from his other businesses to keep X afloat.

One of X’s investors, Fidelity, one of the world’s largest funds managers, has written down the value of its investment in X from $US19.66 million in 2022 to only $US4.2 million, a writedown of nearly 79 per cent. A writedown of that magnitude of X’s total valuation would see it worth only $US9.24 billion.

So, how could Musk possibly believe that he could raise equity at a $US44 billion valuation?

It’s partly because it appears that X’s revenue decline might have bottomed out, with advertisers starting to return.

Musk has also gifted X a 10 per cent stake in his xAI start-up, whose last funding round valued it at $US40 billion and which is now seeking to raise more funds at a valuation of $US75 billion. Musk has said X may end up with 25 per cent of xAI.

He’s also just struck a deal with Visa that will allow X users to effect peer-to-peer payments and transfer funds from their bank accounts, which gives X the start of a financial dimension to Musk’s ambition of transforming X into an “everything” app.

Musk told staff last month the company’s finances remained problematic, according to the Wall Street Journal. Credit: AP

The biggest change in X’s fortunes, however, has been the change in Musk’s own status.

His $US250 million-plus financial support for Donald Trump’s presidential campaign, his subsequent proximity to Trump, and the power Trump has bestowed on him as head of the “Department of Government Efficiency”, or DOGE, have had a golden halo effect on his businesses.

Tesla shares, for instance, have rocketed from about $US250 on election day last year to more than $US360, adding more than $US350 billion to its market value. Bloomberg has estimated that once SpaceX and xAI are included, almost $US1 trillion has been added to the value of his companies since the election, and Musk’s own net worth has risen more than 50 per cent.

It hasn’t gone unnoticed – including by investors in his companies – that Musk’s role in the Trump administration gives him power over the agencies that regulate those companies.

Before the election, the US Securities and Exchange Commission was suing Musk over statements made during his acquisition of Twitter. The SEC is now under new, Trump-appointed leadership and Musk’s scrutiny.

Trump wants to axe everything climate-related that the Biden administration did, including ending a national rollout of electric vehicle charging stations and removing the tax incentives for EV purchases. The former could benefit Tesla, which has its own EV-charging units, while the latter would hurt its competitors more than Tesla.

X’s finance ambitions and its arrangements with Visa would have been regulated by the Consumer Financial Protection Bureau. Musk’s team of DOGE adolescents, however, has targeted the CFPB, which the administration wants to abolish.

Musk last week posted, “CFPB RIP”, with an emoji of a gravestone.

Musk’s elevated status in the Trump White House has given his fortune a big boost.Credit: AP

With Musk’s team slashing and burning their way through the US bureaucracy, and the administration taking, or trying to take, direct control over every aspect of the agencies that survive, bankers, anticipating deregulation, are in risk-on mode.

That might explain why the banks that lent Musk money to acquire Twitter have finally been able to offload most of their loans.

The Twitter deal was funded by $US33.5 billion of equity (most of it Musk’s), $US6.5 billion of leveraged loans from the banks, $US3 billion of secured bonds and $US3 billion of unsecured bonds.

The bank funding was provided by a group led by Morgan Stanley that included Bank of America, Barclays, BNP Paribas, Mizuho and Societe Generale. Reflecting the perceived degree of risk, the loan carried a floating interest rate several percentage points above the rates charged at the time for investment-grade credit. It was expensive debt.

The banks tried, early on, to sell down their exposures to the Twitter debt, but the discounts being demanded by investors and the losses that would entail for the lenders were too significant for them to contemplate. They were stuck with the debt.

Then, last week, the banks sold somewhere between $US4.7 billion and $US5.5 billion of their loans to debt investors.

Let that sink in: New owner Elon Musk arrives at Twitter’s San Francisco headquarters in 2022.Credit: Twitter

Where they initially expected to take a “haircut” of 5 to 10 per cent on the $US3 billion of debt they thought they might sell, the investor demand was such that they were able to shift a lot more, and at 97¢ in the dollar.

While that means they lost as much as $US165 million on the loans they sold, given they would have written down the carrying value of the loans, they would probably be able to write back significantly more than that.

For the new investors, an interest of 11 per cent on the loans would be boosted by nearly half a percentage point by the 3 per cent discount to the loans’ face value that they paid.

While that doesn’t impact X’s interest costs – it will still be paying more than $US1 billion plus a year in interest on its debt – the ability of the banks to sell most of their debt at such a modest discount to its face value does signal confidence by debt investors in X’s future.

Musk is presumably hoping that, in a fairly buoyant market for equity, that confidence will be shared by the new equity investors he is hoping to attract so that he can actually reduce X’s debt loan and free up some funds to further realise his vision of an “everything” app.

The banks’ success in selling down their debt and his newly gained power within the government would encourage him to believe that he may be able to recover at least some of the massive chunk of value that, until last year’s election, he appeared to have lost.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.