Elon's Trying To Get Out Of Buying Twitter—As We Knew He Would
Elon can't get out of his stupidly overpriced, but solidly binding agreement to buy Twitter. But he can tie it up in court. What should bondholders do?
Anyone paying any attention to Elon Musk over the years knows he tends to disregard his obligations when he finds them inconvenient. He may not even honor what he just said yesterday.
So it should surprise no one that Elon is trying to weasel out of his now comically overpriced and arrogantly ill-advised hostile bid for Twitter (TWTR).
I suspect he started working on his exit plan as soon as his buyer’s remorse kicked in, which apparently was right after he signed the contracts. I suspect that was the first time he realized his stupid, attention-seeking stunt could cost him serious money which he didn’t have and could have trouble cobbling together.
Because, as I observed when his bid was announced in April, “we already know Musk doesn’t really part with his own money to fund his alleged “charity” or “jokes” (see Elon Buying Twitter? Probably Not).
No one, certainly not Twitter, forced Elon to buy the company. He pushed the deal, set the price, pushed his unwelcome “best and final offer” which triggered Twitter’s board to immediately initiate a “poison pill” defense. Elon also arrogantly waved off due diligence on the deal and signed off in a matter of days his solidly binding purchase agreement which required him to somehow personally come up with most of the $43 billion in funding to close the deal. It was the Elon Show all the way.
Which made it a bad idea from the start, in my view. As I observed in Twitter: Take the Money And Run:
After all, Musk says he is saving the “future of civilization” by making Twitter the platform for free speech around the globe, and all that. Hopefully without shutting down Twitter’s public relations department in the process like he did at Tesla (TSLA) two years ago so he could ignore questions and feedback and criticism from journalists and regulators and pretty much anybody he doesn’t like—as one does as the proclaimed bastion for freedom of speech (see Elon Buying Twitter? Probably Not).
We’ll see. Meanwhile, it’s less clear that Musk “won” Twitter, since no other bidder stepped up to top his $54.20, which was down 26% versus the stock peak last year. Twitter stock still was trading well below that at $51.20 as of Monday’s close—up less than $3 on news of the deal. On Tuesday the stock slumped back below $50.
For good reason. Deal terms revealed so far leave out important detail about where Musk will or even if he will get all the cash he needs to close the deal at some still undetermined date, subject to shareholder approval. And if the deal does close, Twitter’s already strained financial condition will be crushed under billions of expensive new debt its operations can’t afford to service.
But then Elon, who claimed he didn’t care about the economics of the deal, discovered he was now under urgent financial strain by creating a $43 billion funding commitment to pay for his stunt.
It didn’t help that neither the market nor his bankers seemed to believe he could be counted on to close the deal, much less pay for it. Twitter stock has never traded even remotely close to his overpriced, and ultimately irresistible $54.20 bid price, and closed today some 26% lower at $40.13.
Elon’s bankers demonstrated they would only get on board after locking him in to firm performance commitments to close the deal. And then they agreed to contribute no more than $12.5 billion in debt financing when the deal closes, but that was to be matched by a substantially over-collateralized (at 5-1 ratio) $12.5 billion margin loan on his own Tesla stock, a loan also priced at inordinately high interest rates—signaling how wary were the bankers to get into bed with Elon (see Twitter: Take the Money And Run).
As I projected, Elon’s first order of business was to slash his personal financial exposure starting with eliminating the margin loan. That obligation was becoming more expensive by the day as Tesla stock swooned as confidence plummeted that Elon would effectively tend to problems at Tesla on top of his new Twitter mess. But I suspect his bankers had demanded the margin loan commitment as tangible proof to cover their commitment to execute at least equally matched with credible repayment obligation from Elon versus his vaguely sourced promises of producing cash or equity later.
Elon was only able to get rid of the margin loan by getting $7.1 billion in fresh equity commitments from 19 of his richest friends (see Elon Gets a Boost From Friends For His Twitter Buyout—And Takes *Some* Of The Heat Off Himself) and then increase his total equity commitment to all of the remaining $33.5 billion still due when the deal closes.
But this, as I noted then, revealed more problems that I had expected. The top five of 19 contributors comprised 69% of the total $7.1 billion, leaving the remaining 14 contributing substantially less at just $2.2 billion. This suggests, as I observed, that “success from Elon’s full court press to drum up billions from sorely needed investors appears to have dwindled rapidly, even among his biggest supporters.”
Sure enough, Elon seems to have struggled ever since to get additional equity investors to help whittle down his mammoth funding commitment which could be due over the next six months. That’s not surprising since Elon has demonstrated most every day that he is not the guy one should count on to honor his word, much less his legal obligations.
I warned that Elon’s increasingly erratic behavior was bound to spook prospective investors he so frantically pursues. How comfortable can one feel giving Elon money for his vanity project which he plans to then take private, no doubt run as recklessly as he runs all his companies, avoiding accountability and oversight?
The deal does include a $1 billion breakup fee which Twitter could collect if Elon fails to deliver the payment due, but this doesn’t let Elon off the hook. As long as he has hundreds of millions in publicly traded stock in Tesla he can sell at any time, for example, he can’t say he can’t come up with the cash.
So Twitter can compel him to close the deal as he agreed according to his performance guarantees made to Twitter and his banks.
As I’ve pointed out over the years, Elon doesn’t do well under pressure. He melts down. In his panic he’s often made stupid, knee-jerk decisions that can cause catastrophic damage to his companies as well as their stakeholders: employees, suppliers, investors, etc.
Like when he had then money-losing Tesla (TSLA US), desperate for cash, abruptly close all its sales locations, switch to online-only sales, slash head count, implement additional price cuts to juice flagging sales, hurriedly launch and quickly retract the long overdue (and still never materialized) $35k Model 3, and toss out and botch a haphazard reveal of the long overdue Model Y, which is 70% comprised of the disturbingly flawed Model 3 (See Tesla’s New Plan: Buy Before You Try).
Most of this disaster had to be reversed less than 10 days later when Elon “discovered” buyers do want to see and drive what they may or may not buy and that all those sale locations also are bound by expensive leases one can’t just abandon. But the damage to employees and investors’ portfolios was done (see Tesla’s Plan B 2.0; Y Not).
Nevertheless, Elon has rarely suffered meaningful consequences for the significant damage he’s caused. Like, say, when he boasted in a 2018 tweet about a fake buyout of Tesla at $420 per share, “funding secured,” which ultimately evaporated $20 billion in the company’s market value as his scam was revealed (see Tesla’s New Take-Private Plan: Never Mind). Good times.
And for this, Elon, one of the richest people on the planet, paid only a modest $20 million fine after his conviction for securities fraud and was forced to step down as Tesla chairman. He then hand-picked his own replacement from his sycophantic board and continued on unimpeded, bragging it was all “worth it.”
That mess, like his Twitter debacle, was self-inflicted. But this time, he can’t escape.
Elon Bullied His Way Into A Trap
Elon handles “no” even worse than he handles pressure. He gets angry, and nasty, and vulgar, and vindictive, and ruthless. This has traditionally worked for Elon who most always gets what he wants—while getting richer as well.
This time Twitter is holding his feet to the fire, and it’s not letting go. It doesn’t have to. Terms of the buyout Elon initiated and forced through were effectively constructed to protect it from the perils of doing business with Elon.
Which explains several weeks now of particularly unhinged Elon lashing out on Twitter. About Twitter. Against Twitter. This of course is in violation of the deal terms which specifically prohibited Elon from disparaging the company, which of course Elon seemed to be counting on.
But for investors in long struggling Twitter, Elon is their most profitable exit (see Twitter: Take the Money And Run). So Twitter is keeping its eye on the prize: $54.20 per share. It has no intention of letting go its only golden goose.
So Elon has become suddenly shocked, shocked, to discover Twitter is plagued by spam bots. Which is ridiculous because the whole world knew about Twitter’s spam bots because it has disclosed every quarter for eight years that the “average of false or spam accounts for the quarter represented fewer than 5% of our monthly daily active users during the quarter,” that it “applied significant judgment” to calculate its estimates, and that “the actual number could be higher.”
Elon certainly knew about Twitter’s spam bots long before he tried to buy the company. He even cited fixing the spam bots as a key reason he wanted to buy Twitter—while also waving off any effort at due diligence that he could have done if he actually was worried about Twitter’s publicly disclosed assessment of the problem.
But now, just weeks later—and now that he is struggling to get other investors on board—Elon has decided to accuse Twitter of lying about the gravity of its spam bot problem in SEC filings. Elon claims Twitter’s failure now to prove otherwise as he suddenly demands has breached his agreement to buy the company.
This is rich since, again, Elon himself decided he didn’t want to do any due diligence and so was, effectively, buying the company as is.
Plus the SEC and the FTC are now investigating Elon because he failed to report within legal time limits that he was accumulating his 9.2% Twitter stake with intentions to buy the company—a move that may have netted him a $156 million windfall since he was able to buy the stock at cheaper prices before he announced the news.
Few believe Elon has suddenly become so upset over Twitter’s spam bots. More likely he’s just grasping at anything—even lying—to get out of the mess he has made.
Nevertheless, he publicly announced on May 13th—in a tweet—that the deal was “on hold.” Never mind that putting the deal on hold is not allowed or even recognized as a possible remedy for Elon or Twitter to do, per the deal terms.
I expected Elon to pull something to, as I put it then, to bolt without paying the check. As I speculated in Twitter: Take the Money And Run:
My Twitter LBO Is So Ugly Even My Dog Won’t Play With It
Twitter looks best from a distance. The idea of Twitter seems even better. Owning Twitter is far less fun. I still doubt that Elon put much time in effort into buying Twitter until after he let the idea fly. Elon is more about the fun. If so, the more he gets into the weeds of the deal the greater the chance that he sours on it. The best case for him, and his ego, is that he goes through with the deal, but only after greatly reducing his overall financial risk. There’s still a good chance he finds an excuse to leave in a huff without paying the check—but better to leave with a bruised ego and keep his most of his fortune.
I doubt Elon can lie his way out of what seems to be a solidly written contract he pushed for and rushed to sign. Legal experts have weighed in that Elon will be hard pressed to prove in court that Twitter had deliberately misled in its public filings or disclosures to him the gravity of its spam bot problem, much less demonstrate that the harm by doing so was sufficiently damaging to create a “material adverse effect” on reported earnings or its imputed market value.
But Elon can afford, as the richest man on the planet, to pay a suite of expensive lawyers indefinitely to keep Twitter tied up in court fighting about it until they force a settlement for a lower deal price or, what he really wants, to get him out altogether for something probably less than $1 billion. The deal also could fall apart sooner if the banks decide to pull their financing commitments made on condition the deal closes, in which case Elon would fail to deliver financing as agreed and would owe Twitter the $1 billion breakup fee—which Elon would probably still fight...because, Elon.
While Elon can no doubt outspend and outlast Twitter in legal battles, it won’t be cheap—just cheaper than $43 billion. I expect waves of lawsuits could materialize against Elon from Twitter and likely Tesla shareholders seeking compensation for damage Elon has recklessly inflicted on the market caps of both.
And this is before Tesla stock suffers further if, as I expect, operations struggle to meet record performance last year (see Tesla's China Syndrome Will Spread):
Tesla’s biggest year ever ended with peak sales in Models 3 and Y—and lots of red flags.
Most of its sales achievements over the years have come when credible competition was thin or, as with 2021, its biggest competitors were impaired by comparatively more serious supply disruptions. Both these barriers are falling hard.
To meet the challenge, Tesla comes into 2022 with really only one model that can be described as still thriving. That’s Model Y, and it’s mostly a bigger version of Model 3—both little changed since 2018 and still just as problematic.
By comparison, Tesla’s rivals are running hot in every market with literally dozens of exciting new models and new model line-ups already out and coming in the next 2-3 years. The biggest threats are coming from Tesla’s toughest competitors—legacy automakers Ford (F), General Motors (GM), Toyota (TM), Stellantis (STLA), BYD Co LTD, and more.
Tesla’s quirky Cybertruck, revamped Roadster, and Semi Truck, when and even if they ever appear—which is far from certain—will not move the needle against such competition. Tesla’s $35,000 Model 3 never really materialized because it couldn’t afford to make it. Its promised $25,000 MIC compact hatchback for China, Europe, and other markets will more likely eat into Model 3 and Y sales—whenever it finally appears.
If so, there’s a good chance that Tesla’s fourth quarter of 2021, its best quarter ever, might prove to be its peak quarter for a while.
If so, I can’t wait to see Elon’s excuses on Twitter. More pressure.
Twitter In Limbo
The longer Elon can stretch out the torture the less likely it is that he’ll be forced to buy the company as agreed.
That's more bad news for Twitter, already incurring expensive and ongoing legal costs for a sale it never wanted—a bill that could keep growing for the foreseeable future unless it gives in to the world’s richest bully.
The best strategy for current Twitter (versus the even more precarious version of Elon-owned Twitter) is to fight hard and urgently to compel Elon, in court if necessary, to complete the deal as agreed as soon as possible. Then existing shareholders take home the best price they may see for years, or ever.
This also is the optimal outcome for wary investors in Twitter bonds, since they can cash out with the change-of-control put at 101% of par. Meanwhile, the bonds have sunk as I expected back to the mid-90s as Elon turned sour on the deal.
Unless Twitter and Elon suddenly find joy together, which doesn’t seem likely anytime soon (if at all), meaningful good news for Twitter could be elusive. Second quarter results, expected on July 26th, could be mixed at best.
Market consensus indicates improved revenue at $1.3 billion (up 13% y/y) and EBITDA at near $300 million (22.2% margin; up 630 bps). If so, indicated leverage may still inch higher to 4.4x versus 4.2x at the start of the year unless debt comes down. Recent guidance from management also indicated revenue increasingly pressured by slower user growth and ad engagement across the industry. So, potentially marginal improvement going forward.
Trading in Twitter’s existing bonds are substantially lower, reflecting increasing considerable uncertainty that the deal will close as Twitter’s dicey prospects. Twitter’s existing $1.7 billion in senior notes are callable at 101% of par if the company is sold, but the new $1 billion issue of 5% notes due 2030 were down 5 points versus my last report at 97.3 (5.43% ytw). The $700 million 3.875% notes due 2027 were down 4 points to 95.4 (4.83% ytw). Another 4-5 points downside is possible, with significant only upside only if Twitter is sold so existing bondholders can cash out—which is far from certain. (Definitely avoid buying new Twitter bonds offered to help fund the LBO if the company is sold.) Maintain “Underperform.”
The Kinks: Tired of Waiting
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Twitter is giving in to Elon's bullying and turning over spam bot data he dismissed reviewing before signing off on his hostile bid. But I suspect Elon doesn't want answers—he wants out. If so he'll just keep moving the goalposts.
https://www.washingtonpost.com/technology/2022/06/08/elon-musk-twitter-bot-data/