Breakingviews: Musk Twitter bid becomes less virtual, more risky

Elon Musk can finally say “funding secured” without getting into trouble. The Tesla boss angered U.S. securities regulators in 2018 by falsely claiming he was taking the electric carmaker private. On Thursday, his bid for Twitter became less virtual with the disclosure that he’s lined up financing. It’s also become more risky, though.

The entrepreneur is mulling a tender offer for the social network at $54.20 a share, valuing its equity at about $44 billion. Add in Twitter’s $5 billion of debt and about $1 billion of fees, and the total is about $50 billion, excluding cash on the company’s balance sheet. Musk already owns Twitter stock worth roughly $4 billion, but that leaves a big hole to fill.

Almost half that amount – around $21 billion – is apparently coming from Musk himself. And he’s planning to raise another $12.5 billion by borrowing against his 17% stake in the $1 trillion Tesla. Meanwhile, banks led by Morgan Stanley pledge to lend $13 billion – more than nine times Twitter’s expected EBITDA this year.

The numbers could stack up. Analysts reckon Twitter will make about $6 billion in revenue next year, with an EBITDA margin of 24%, according to Refinitiv data. For a rosy scenario, assume the company’s top line grows at 15% a year and the EBITDA margin improves to 30% over five years. If Musk could sell at the same 30-plus multiple of that profit metric he is offering he could roughly triple his money, Breakingviews calculates using simplified assumptions. That would equate to an internal rate of return of more than 25%.

Such juicy returns could lure private equity buyers to join Musk. However, Twitter’s cash flow has been erratic. Last year the company earned only $633 million of cash from operations, but splashed out over $1 billion on capital expenditure. Perhaps Musk could manage the firm better, but if he follows through on his thoughts of reducing content moderation, advertisers might flee. A recession or stock market sell-off would also lower Twitter’s value.

Musk may still not win Twitter, or even make a tender offer. For one, his funding documents were signed on April 20 – an apparent cannabis joke that echoes his disappearing “offer” for Tesla at $420 a share. Twitter’s board has yet to offer an opinion, and the company’s stock price is 14% below Musk’s mooted bid. Still, he can say “funding secured”.

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BREAKINGVIEWS