What’s the easiest way to buy something? With other people’s money. That’s the key to almost all of the leveraged buyouts (LBOs) that have dominated mergers and acquisitions for a generation. Elon Musk’s $44 billion planned takeover of Twitter has had many twists and turns, but after spending months trying to get out of the deal, as of Oct. 3 the billionaire head of Tesla Inc. is now once again moving forward with the acquisition, which could close as soon as late October. While his take-private of Twitter is an LBO, it differs from most in several important respects.
1. What’s a leveraged buyout?
LBOs are acquisitions where debt plays a crucial role. The basic idea is to buy a company through a combination of equity and new debt. But the key is that the acquirer, most commonly a private equity firm, doesn’t borrow the money — the target company does. LBOs limit the downside for the buyer: If things go wrong, the company goes bankrupt, not the buyer. LBOs also increase the buyers’ upside because they can acquire bigger companies than they otherwise could afford.
2. How much leverage is there in most LBOs?
Private equity firms typically try to put in as little equity as possible, to increase their potential return. But the limiting factor is usually how much debt the target company can service without debt payments dragging it down. The ratio of equity is typically around 45% to 50% of the deal. The word “leveraged” refers to a special metric that compares the amount of debt to a company’s earnings, and that ratio is typically high in these transactions. The upper bound is roughly 6 times, but that can go higher depending on the deal.
3. How is what Musk doing different?
Musk is playing the role of the private equity firm in Twitter’s leveraged buyout. He’s on the hook to provide about $33.5 billion in equity, or about 72% of the total $46.5 billion in financing, with the remainder coming from a debt package provided by big Wall Street banks. Included in that equity contribution, Musk already owns more than 73 million shares, which are worth about $4 billion at the $54.20 purchase price. A group of 19 investors including billionaire Larry Ellison agreed to cover another $7.1 billion of Musk’s $33.5 billion share. If Musk’s current stake in Twitter is excluded, his proposed purchase would be the fourth-largest deal in which a public company was bought and taken private.
4. Where are the equity commitments coming from?
Of the $7.1 billion being kicked in to help Musk, about $5.2 billion is from 18 equity partners who joined the deal; the other $1.9 billion will be generated by Saudi Prince Alwaleed bin Talal Al Saud rolling over his current Twitter stake, according to a filing on May 5. An increase in the equity component helped replace initial plans to use $12.5 billion in loan commitments backed by Tesla stock pledged by Musk in what’s known as a margin loan. Musk is worth more than $220 billion, according to the Bloomberg Billionaires Index, but most of that is not liquid. To raise more cash to fund his equity commitment, he could sell assets, including more Tesla shares. He could find more equity partners. He also could sell preferred equity in Twitter. That’s a special type of stock that essentially gives the holders additional benefits, such as hefty annual dividends. Musk had held discussions to potentially raise more capital from investors such as Apollo Global Management Inc. and Sixth Street Partners earlier this year, but those firms abandoned the talks months ago, around the time Musk backtracked from the deal.
5. How much debt would be added to Twitter’s balance sheet?
About $13 billion, the amount banks have committed to lend Twitter to carry out its side of the deal. Twitter’s credit rating is already below investment grade, so this new debt would come in the form of junk bonds and leveraged loans. As is normal in LBOs, the intention was for the banks to then sell that risk in the form of longer-term debt to outside investors, but the banks are on the hook and would have to cough up the money if anything goes wrong. Based on the structure laid out in public filings, the commitments would likely be replaced by $6.5 billion of leveraged loans, $3 billion of secured junk bonds and $3 billion of unsecured junk bonds. The banks also provided $500 million of a special type of loan called a revolving credit facility that Twitter will be able to borrow from and pay back over the life of the loan.
6. Could the debt financing fall through?
Almost certainly not. The debt financing does present a headache — but for the banks, not for Musk. Led by Morgan Stanley, seven banks underwrote the debt, meaning they are on the hook to provide the cash, period. If banks do fund the debt, they could potentially syndicate the bonds and loans to investors at a later date. But credit conditions have worsened since banks committed to the debt in April, meaning they will likely see a loss on at least some portion of any debt sale.
7. What debt does Twitter have now?
Twitter has already tapped the junk bond market and has two outstanding bonds for about $1.7 billion total, plus some convertible notes. Twitter is likely to pay off existing debt as part of the transaction. If the LBO happens, Twitter will have billions of dollars more in debt on its balance sheet. CreditSights, a credit research firm, sees total leverage increasing to a ratio of 9 times a measure of earnings, up from 3.7 times previously, according to a report published on April 25.
8. What does this deal mean for Twitter’s finances?
The increased debt load means it will have little margin for error going forward. Private equity firms typically load up a company with debt, slash costs and try to boost revenues. Earnings have to grow rapidly so the company can afford its high interest payments and eventually pay back debt. Some analysts are projecting that the deal will leave Twitter highly indebted compared to its projected earnings, which could mean pain if the company can’t grow fast enough.
More stories like this are available on bloomberg.com
McKesson Centrifuge Tube Conical Bottom Plain 30 X 115 mm 50 mL Blue Screw Cap X 25 / PACK
Source link: https://www.washingtonpost.com/business/elon-musks-twitter-deal-is-different-than-most-lbos-heres-how/2022/10/06/1cee4b02-45be-11ed-be17-89cbe6b8c0a5_story.html?utm_source=rss&utm_medium=referral&utm_campaign=wp_business