The foundations of Elon Musk’s digital town square are wobbling

Reports that Elon Musk is looking to raise more equity for Twitter before year-end are the latest of a series of indications that the fate of the social media platform he bought for $US44 billion ($A65 billion) earlier this year is on a knife’s edge.

They also suggest that Musk and/or his advisers are delusional, with US news site Semafor reporting that the managing director of Musk’s private family office, Jared Birchall, was sounding out potential investors at a price of $US54.20 a share – the same price Musk paid to take Twitter private.

Elon Musk purchased Twitter in October for $US44 billion ($66 billion).Credit: Getty Images

Given that, when Musk’s bankers tested the market for the leverage loan portion of the $US13 billion debt package for the acquisition, they were offered 60 cents in the dollar, an attempt to raise equity at the price Musk and some co-investors paid is extraordinarily optimistic. If Twitter’s debt is worth less than its face value then by definition its equity is worthless.

Indeed, last month Musk himself said Twitter had suffered a massive drop in revenue since it was acquired and was losing $US4 million a day.

Its finances haven’t been helped by Musk’s own actions, including the inviting back of Donald Trump and others previously banned by Twitter (including, momentarily, Kanye West before his anti-Semitic rave) and the recent banning, and then reinstatement, of journalists Musk accused of “doxxing”, or revealing his location by referring to a site that has tracked his private jet.

Advertisers are shunning a platform that generates about 90 per cent of its revenue from advertisements.

Musk sold more of his Tesla shares this month, raising $US3.6 billion, despite promising earlier this year that, having raised nearly $US40 billion by selling down his Tesla shareholding since late last year, there would be no more sales.

It would appear that Musk is anxious, even desperate, to restructure the funding he arranged for the Twitter deal, replacing some of the debt with equity, if not from external investors then from his own resources.

With US interest rates rising, a portion of Twitter’s debt funding floating rate and an existing interest bill of more than $US1 billion a year for a company that lost $US221 million last year – before the advertisers started fleeing – the funding clearly needs restructuring.

The $US33.5 billion of equity in the original structure was mostly provided by Musk himself. External investors provided just over $US7 billion and Musk the rest. His latest sale of Tesla shares suggests his commitment will rise and that he might even have to sell more of his shrinking Tesla holdings if the attempt to raise more external equity fails.

There are also reports that Musk’s bankers are themselves trying to restructure the loans, which they were unable to syndicate and can’t get off their balance sheets without incurring multi-billion dollar losses.

According to Bloomberg, they’re considering a swap of some of the more expensive debt in their package for margin loans backed by Musk’s remaining unencumbered Tesla stock. Tesla’s Securities and Exchange Commission filings have shown that about half his remaining shares had been pledged for an existing margin loan.

Putting up more of his Tesla shares as collateral would be a high-risk move for Musk, given that Tesla’s shares have plummeted this year.

Since the Twitter bid was announced Tesla’s market capitalisation has fallen from $US1.2 trillion to $US474 billion. That’s a fall of about 60 per cent. To put that decline into perspective, the tech-heavy Nasdaq index has fallen about 29 per cent over the same period and the New York FANG index, which includes Tesla and other mega-tech stocks like Apple, Amazon and Facebook, 35 per cent.

Tesla shareholders are angry that Musk, their chief executive, is essentially living in Twitter’s headquarters and devoting his time and attention to Twitter rather than their company, which has been experiencing difficulties in a flat-lining, COVID-impacted China and a rapidly slowing US auto market.

With a forward price-earnings multiple of more than 30, Tesla’s share price remains vulnerable and the tie Musk has created with a floundering Twitter won’t help Tesla shareholders. There is now a Twitter shadow over Tesla that includes an over-hang in the market from the liens on Musk’s shareholdings and the potential for margin calls and/or further sales.

The chaotic and frenetic management style Musk has demonstrated at Twitter would be unsettling for his bankers and Tesla shareholders concerned about his financial and mental stability.

He fired half Twitter’s employees at once and then, discovering he actually needed some, tried (without much success) to rehire some of them.

He has installed beds in Twitter’s offices for the “hardcore” workers who remain and also threatened not to pay redundancies. Musk isn’t paying Twitter’s rent and is seemingly managing the company through an incessant and erratic stream of tweets.

But there’s a glimmer of light. Defying some predictions that were based on the mass exodus of Twitter’s engineers, the platform hasn’t broken down and the volume of posts on Twitter seem to have increased significantly.

The flip side of that is the return of anti-Semitic material and the far right which, with the demolition of the teams and processes responsible for Twitter’s content moderation, data security and privacy protections and Musk’s own arbitrary banning and shadow-banning of users, has caught the attention of regulators.

The European Union has already warned him that it could ban Twitter in Europe – or fine it six per cent of its global revenues – if it doesn’t have mechanisms for identifying and removing illegal or harmful content. The EU’s Digital Services Act that came into force last month has very strict data protection rules and standards that target hate speech and disinformation.

Elon Musk’s libertarian ambition of turning Twitter into a digital town square has run into trouble.Credit: AP

Musk may see himself as a “free speech purist” but if he wants to retain access to Europeans he might have to re-hire a lot of the content moderators he’s sacked.

The Committee on Foreign Investment in the US is also scrutinising the outside investors in Musk’s bid structure to see whether there is any risk to national security and Congress is investigating Twitter and other social media platforms for their handling of user’s data and their role in spreading misinformation and disinformation. There are also cases before the US Supreme Court that could make platforms liable for promoting illegal or harmful content.

Musk’s libertarian ambition of turning Twitter into a digital town square governed by the principle of free speech absolutism is destined to collide with the ambition of lawmakers to protect users’ privacy, suppress hate speech and other harmful content and stamp out disinformation. In the real world, if not in Musk’s mind, freedom of expression has some limits.

If he can’t stabilise Twitter’s wobbly finances and increase its revenues then, regardless of how many users there are on the platform or the volume of their tweets, debates about content will be irrelevant because Twitter, or at least Musk’s version of it, will cease to operate and Musk, his equity partners, his banks and perhaps even Tesla shareholders will face horrendous losses.

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