Elon Musk presents his bank backers with $US44bn headache

The dramatic takeover of the social media group has potentially left Musk’s bankers with a huge bill.

In the world of blockbuster takeovers, Elon Musk’s $US44bn ($A65.71bn) acquisition of Twitter is unprecedented for having almost every twist and turn play out in the open.

From trailing his decision in tweets to start a subscription service called Twitter Blue to polling users on whether he should resign as chief executive, many of the big decisions made by the billionaire since taking charge have been brainstormed in public, sometimes with the input of the platform’s users.

But in the circus surrounding Musk’s ownership of the social media group, no one will be paying closer attention to the fate of the company than the bankers who orchestrated the giant financing package that enabled the entrepreneur to pull off his highly leveraged takeover in the first place. Seven banks have provided about $US13bn of debt for the transaction, which was agreed in April and eventually completed on October 27. Ordinarily, the lenders would quickly have struck deals to sell on the debt; instead, an attempt by Musk to walk away from the Twitter acquisition meant that debt sales were not arranged.

Meanwhile, a sell-off in debt markets this year as central banks have raced to raise interest rates, along with Musk’s chaotic leadership of Twitter, mean that the banks would face enormous losses if they tried to shift the loans off their books now. It emerged last month that some investors had offered to purchase a portion of the debt for as little as 60c on the dollar, a level that was too low for lenders to accept.

As a result, the banks are stuck with the risky financing on their books, with the uncertainty over Twitter’s future seemingly increasing by the day. After a majority of users voted in favour of Musk, 51, resigning as the company’s boss, or “chief twit”, last week he pledged to stand down once he had found “someone foolish enough to take the job”.

The lenders’ predicament is engrossing bankers on Wall Street and in the City of London. “It’s significant losses that they’re facing,” said a top financier at a bank that did not provide debt for Twitter. “I’m sure they were praying for that deal not to happen, but in the end it did.”

Another said: “It’s not pretty.”

The bulk of the debt has been provided by Morgan Stanley, Bank of America, Barclays and MUFG, the Japanese lender. The rest comes from BNP Paribas, Societe Generale and Mizuho. Musk’s equity commitment on the deal amounts to $US33.5bn, including $US7.1bn from other investors.

The high-interest debt that has been piled on Twitter inevitably puts significant pressure on the company. Musk, in his typically blunt style, told a Twitter Spaces online forum last week that it faced “in the order of $US1.5bn-ish” in annual debt interest payments. Twitter’s ability to service its borrowings is becoming strained, though. Some advertisers have fled the social media platform after a series of divisive cost-cutting decisions by Musk since he took ownership of the business. These have included a move to shed about half of Twitter’s workforce, which had stood at about 7,500 staff.

Twitter generated revenues of $US5.1bn last year, but Musk said this week that sales next year were “probably tracking” at $US3bn.

“That’s like a negative cashflow situation of $US3bn a year – not good, since Twitter has $US1bn in cash. So that’s why I spent the last five weeks cutting costs like crazy,” he said at the Twitter Spaces event.

He described the company as “a plane that is headed toward the ground at high speed with the engines on fire and the controls don’t work”.

It is perhaps not the analogy Musk’s bankers were picturing when they committed to back the tycoon’s takeover of Twitter in the spring.

When Musk first proposed the acquisition, the appeal of working on the deal was obvious. Not only would the investment banks earn big fees for helping the world’s richest person to pull off one of the largest buyouts in history, but also by supporting Musk they potentially put themselves first in line to secure further future lucrative work from the entrepreneur’s other companies, which include Tesla, the electric car company, and the SpaceX rocket business.

Indeed, Musk was already an established client of Morgan Stanley. The Wall Street bank helped Musk to float Tesla in 2010 and was hired to advise the tycoon in 2018, when he flirted with the idea of taking the car manufacturer private. It is now the biggest lender on the Twitter deal, having contributed about $US3.5bn of debt.

Despite the turmoil that has gripped Twitter since April, James Gorman, the Morgan Stanley chief executive, remains an admirer of the billionaire. He told a Reuters conference at the beginning of December: “I wouldn’t bet against Elon Musk.” He added that “institutions like ours are not stupid, we don’t get behind that kind of business and that kind of opportunity unless we believe it’s real, and it’s very real”. He went on to liken Musk to Steve Jobs and Bill Gates. “Shame on an institution who’d walk away from that.”

Even so, the economic environment has changed dramatically since the Twitter takeover was agreed and the company’s financial health appears to have deteriorated under the erratic leadership of Musk, who this month relinquished his position as the world’s wealthiest person because of a slide in the value of Tesla amid worries he is being distracted by his new purchase.

Scott Kessler, a telecoms, media and technology analyst at Third Bridge, an American investment research house, said: “The banks that signed on early in this process were essentially on the hook as conditions got worse, but their terms didn’t get more favourable.”

Barclays, BNP Paribas, MUFG and Societe Generale declined to comment. Morgan Stanley, Bank of America and Mizuho did not return requests for comment.

Bruce Daisley, Twitter’s former European vice-president, who left the company in 2020, said Musk’s management of Twitter so far suggested the billionaire often “reaches for the simplistic, reductive answers” to problems. ” ‘I’ll solve verification with this.’ Turns out it’s not that easy,” Daisley said. “‘I’ll put these through an opinion poll.’ Okay, turns out it’s not that simple.”

Similarly, tackling Twitter’s debt problem will not be straightforward for Musk and his lenders, which are waiting for the cloud of uncertainty shrouding the company to lift before trying to shift the debt.

This month, Bloomberg said one option under consideration was swapping a $US3bn slice of Twitter debt that carries an 11.75 per cent interest rate with margin loans secured against Tesla shares. Musk himself would be on the hook for these Tesla-backed loans, which probably would be less expensive than the existing debt. This similarly would help the lenders, which would be able to sell the Tesla stock if needed.

Musk also could buy some of the Twitter debt, although this would mean the banks realising heavy losses.

As Musk himself tweeted last month: “How do you make a small fortune in social media? Start out with a large one.” It is a joke that is likely to have been close to the bone for the banks that potentially face hundreds of millions of dollars – possibly even billions of dollars – of losses for backing the unpredictable tycoon.

The Times