Breakingviews – What is Morgan Stanley smoking on LBO Twitter?

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

LONDON, April 25 (Reuters Breakingviews) – Have Morgan Stanley (MS.N) bankers inhaled any of Elon Musk’s favorite weed? That’s one explanation of the debt package they’ve put together to finance the proposed purchase of Twitter (TWTR.N) by the boss of Tesla (TSLA.O). Read more. But the loans seem more rational if you look through the smoke.

Musk’s fledgling takeover got less flaky last week after he revealed a $46.5 billion offer financing package. Morgan Stanley and others are lending the Tesla boss $12.5 billion secured against his shares in the electric-car maker Read More. The Wall Street firm has also arranged loans and a $13 billion credit facility with Bank of America (BAC.N), Barclays (BARC.L) and others. The social media company may announce on Monday that it has accepted Musk’s offer, Reuters Read More reported.

The financing, which Musk’s bankers agreed to within a few days, will have drawn attention on Wall Street. Twitter generated nearly $1.5 billion of EBITDA last year, excluding a shareholder litigation settlement. A Musk acquisition would inflate the company’s leverage to 8.6 times EBITDA, excluding cash on its balance sheet. The interest alone could cost $939 million a year, or about two-thirds of Twitter’s EBITDA, according to the loan terms and bridge financing. That leaves lenders with little protection if growth reverses. Such a scenario is all too plausible if Musk scares off advertisers by hacking his way through content moderation rules in the interest of promoting free speech.

A financial partner like Thoma Bravo could provide some reassurance, though it’s doubtful the buyout firm can contain the billionaire. A better reason for hope is that Musk has a lot of skin in the game. Including the margin loan, which he will have to honor or risk losing his Tesla shares, he could be in for as much as $33.5 billion, or about three-quarters of the total package. The average purchase in the US last year was 58%, using data from PitchBook.

Musk’s exposure is considerable even for a man of his net worth, which Forbes estimates at $270 billion. That gives him a good reason to worry about the financial health of the company, even if he says he doesn’t. If Twitter continues to grow as analysts expect, leverage would drop to less than 7x EBITDA by 2023.

No doubt Morgan Stanley is also thinking about the big picture. Musk’s love of margin lending makes him an attractive private banking client. Pleasing him increases the bank’s chances of participating in future deals involving Tesla and SpaceX. Keeping the world’s richest person in a high mood is worth a little risk.

Follow @liamwardproud On twitter

CONTEXT NEWS

– Twitter is about to agree to 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 a share, already owns more than 9% of the company.

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

Edited by Peter Thal Larsen and Oliver Taslic

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, according to the Trust Principles, is committed to integrity, independence and freedom from bias.