Elon Musk holding the Twitter deal may not be a ‘bot problem’ after all. The Tesla CEO — who seemed really enthusiastic about taking over Twitter to solve ‘free speech’ problems — has repeatedly expressed discontent over the past few days regarding the company having a large share of bots. However, obscured behind all this is an underlying issue of interest payment against the $13 billion debt, which is looking more problematic over time. And this could potentially mean he will be the US’ most leveraged CEO.
In a filing made with the Securities and Exchange Commission of the US in April this year, Elon Musk has revealed that he received many commitment letters from banks that would fund his Twitter takeover. However, billions of dollars in loans means billions of dollars in interest payment, and Elon Musk is just faced with that. It is estimated that the package, which was signed in a hurry, will leave Twitter and Musk with an annual interest expense of nearly $1 billion, a Bloomberg report says. This may not end up on a good note, and will leave Twitter with minimal room for error in business.
SECOND THOUGHTS ON TWITTER DEAL NOT A SURPRISE
As per credit-minded analysts quoted by Bloomberg, second thoughts regarding the deal will not be a surprise. While Musk wants to fund around $21 billion of the Twitter deal through cash, and the rest with a mix of debt and lines of credit. This means, more than half of the deal will be funded through high yield bonds and a leveraged loan.
“CreditSights estimates this will dramatically increase Twitter’s annual interest expense to around $900 million, while Bloomberg Intelligence sees $750 million to $1 billion,” Bloomberg said in a report.
The numbers, be it $900 million or $750 million, are alarmingly high and it is inevitable for Twitter to run into cash burning, which may pressure the new owner to think of other ways of generating revenues and slashing costs. However, this is in line with Wall Street analysts predicting record earnings in this fiscal year. These estimates could very well go under the train if a recession, that’s rumoured to set in, actually does so. The irony here is that it is Elon Musk who on Monday said there is an impending recession coming in the US’s way that could last from 12 to 18 months.
TWITTER MAY GO DEEPER INTO DEBT
“This is just a bad capital structure to put on a business like Twitter that has never proven to be highly profitable,” John McClain, portfolio manager at Brandywine Global Investment Management told Bloomberg. “It’s been a public company for quite some time and they never have seemed to really figure out how to attractively monetize the consumer,” he added.
What bankers have estimated from the financial package will take Twitter further into debt if the deal goes through, upping the interest costs by a huge margin as compared to the past one year.
“Leverage is really high and free cash flow is going to be negative out of the gate, so that certainly adds an element of risk to the deal,” Jordan Chalfin, a senior analyst at credit research firm CreditSights, told Bloomberg in an interview. “Twitter really needs to grow into their capital structure and drive earnings higher in order to cover both their capital expenditures and their interest expense.”
IS THERE A SILVER LINING FOR ELON MUSK AND TWITTER?
Turning the company profitable may be possible in the long run, but not right now as per analysts. Even with the predicted record earnings in 2022, Twitter is poised to burn through cash with all its capital expenditures and the newly added interest expenses. In 2023, Twitter may post a neutral cash flow followed by a positive cash flow the year next, if Elon Musk is successful in providing the required growth to Twitter.
“Twitter does have about $6.3 billion in cash and short-term investments that could support burning cash for a few years,” Bloomberg Intelligence’s Schiffman was quoted as saying. Elon Musk’s debts against his Tesla shares could also potentially put Tesla shareholders in a bumpy ride as the automaker’s wealth could be at risk.