What is Morgan Stanley smoking in Twitter LBO?

LONDON (Reuters Breakingviews) - Have Morgan Stanley’s bankers inhaled some of Elon Musk’s favourite herb? That’s one explanation for the debt package they’ve put together to fund the Tesla boss’s proposed Twitter buyout. But the loans look more rational if you peer through the smoke.

A screen displays the trading information for Morgan Stanley on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 19, 2022.

Musk’s budding takeover became less flaky last week after he unveiled a $46.5 billion funding package here. Morgan Stanley and others are lending the Tesla boss $12.5 billion secured against his stock in the electric-car maker. The Wall Street firm has also put together loans and a credit line worth $13 billion with Bank of America, Barclays and others. The social media company may announce on Monday that it has accepted Musk’s offer, Reuters reported.

The financing, which Musk’s bankers hashed out in a few days, will have raised eyebrows on Wall Street. Twitter generated almost $1.5 billion of EBITDA last year, excluding a shareholder-litigation settlement. A Musk takeover would puff up the company’s leverage to a heady 8.6 times EBITDA, excluding cash on its balance sheet. Interest alone could cost $939 million annually, or roughly two-thirds of Twitter’s EBITDA, based on the loan and bridge finance terms here. That leaves lenders with little protection if growth goes into reverse. Such a scenario is all too plausible if Musk spooks advertisers by blazing his way through content-moderation rules in the interests of promoting free speech.

A financial partner like Thoma Bravo might provide some reassurance, though it’s doubtful the buyout firm could restrain the billionaire. A better reason for hope is that Musk has lots of skin in the game. Including the margin loan, which he’ll have to honour or risk losing his Tesla shares, he could be on the hook for as much as $33.5 billion, or roughly three-quarters of the total package. The average for U.S. buyouts last year was 58%, using PitchBook data.

Musk’s exposure is chunky even for a man of his net worth, which Forbes puts at $270 billion. That gives him good reason to care about the company’s financial health, even if he says he doesn’t. If Twitter keeps growing as analysts expect, leverage would fall to less than 7 times EBITDA by 2023.

Morgan Stanley is doubtless also thinking about the bigger picture. Musk’s love of margin loans makes him an attractive private-banking client. Pleasing him boosts the bank’s chances of being involved in future deals involving Tesla and SpaceX. Keeping the world’s richest person in high spirits justifies a little risk.

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- Twitter is poised to agree a sale to Elon Musk for around $43 billion in cash, Reuters reported on April 25, citing people familiar with the matter.

- Musk said in a securities filing on April 21 that he has lined up $46.5 billion in financing to buy Twitter. Tesla’s chief executive, who has offered to buy the social network for $54.20 per share, already owns over 9% of the company.

- Morgan Stanley and other banks have committed to providing $13 billion in loans. The investment bank and other lenders have also agreed to provide $12.5 billion in margin loans to Musk, secured against his stock in the electric-car maker. Musk has committed to cover the remaining amount, including fees, which is estimated to be $21 billion.


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