When Elon Musk offered to take Twitter (TWTR) private, he pledged $21 billion of his personal wealth to the deal. The Tesla (TSLA 1.85%) CEO already sold about $8 billion of his stock in the electric vehicle company, so he will most certainly have some skin in the game. But Musk is also looking for private equity firms to contribute some cash to the deal, shrinking his own cash investment and potential ownership stake even further.
What does he really want from this controversial deal?
The original deal structure
Let's start with the original ownership structure of the proposed Twitter buyout:
- A consortium of banks agreed to inject $13 billion in loans secured against the Twitter business.
- Another $12.5 billion in bank loans is backed by Musk's Tesla stock.
- Finally, $21 billion of the price tag will be paid out of Musk's pocket.
In Tweets made after the deal announcement and the subsequent Tesla stock sales, Musk has said that he won't sell any more stock in support of this buyout. That sounds strange to me because this man has a history of keeping his wealth locked up in stock and other assets, to the point where he often needs to sell shares to maintain his lifestyle, pay taxes, and cover other basic needs. In fact, he moved from California to Texas just to keep the tax agencies further away from the capital gains on his stock sales.
Musk said he would finance the rest of his Twitter investment in a way that doesn't involve selling Tesla shares. This way, he'd end up owning roughly 45% of Tesla outright, and another 27% stake comes with an asterisk, being tied to stock-supported bank loans.
Image source: Getty Images.
What's new?
Musk is looking for more buyout partners. According to Reuters, he's talking to a large number of private investment firms, fellow billionaires, and hedge funds that might want to own a piece of the microblogging service.
Specifically, he has offered these potential partners preferred equity stakes in the privately held version of Twitter, giving them both stock-like interests in the company's equity value and annual or quarterly interest payouts, much like a normal dividend.
Furthermore, some of Twitter's current shareholders may choose to convert their holdings into one of those preferred equity packages. Former Twitter leader and current Square (SQ 5.04%) CEO Jack Dorsey is reportedly thinking about it. Dorsey is Twitter's seventh-largest shareholder today, so that move alone could lower Musk's cash expenses by a significant margin.
So what's the big idea?
It looks like Elon Musk isn't interested in taking absolutely full control of Twitter. And Twitter's free cash flows were a negative $380 million in 2021, based on top-line revenues of $5.1 billion. That was the worst cash-flow result in Twitter's history as a public company:
TWTR free cash flow data by YCharts.
So Musk isn't grabbing a fully operational cash machine that surely will pay for itself, either.
Musk's official explanation is that he wants to make Twitter a "politically neutral" platform where free speech can thrive on a global scale. For the most part, that means curbing Twitter's current restrictions on right-wing firebrands. He also wants to make it a more human messaging system, where automatic bots and marketing spam aren't welcome. I wish him luck in chasing these contradictory goals.
But in securing the bank deals behind his bid, Musk also promised to improve Twitter's financial footing. He'll limit executive pay and board member compensation, and will also seek new ways to monetize Twitter's traffic.
Again, that vision seems to be in conflict with the ambition to limit marketing and ad traffic. He might want to boost the Twitter Blue premium subscription tier by banning ads from that service tier. Musk also told the banks that he'd like to charge other websites and services a fee for quoting tweets from verified accounts. In my view, that would be a highly effective way to stop people from quoting viral tweets, killing the platform's mass-market visibility in the long run.
Why investors should care
To some extent, it doesn't really matter why Elon Musk is buying Twitter. As long as he remains committed to the deal until all the necessary regulatory approvals and shareholder votes have been secured, every Twitter holder will get their $54.20 per share as the world keeps on turning.
But the more Musk fiddles with the financing structure, the less I believe that he will stay the course. And I'm not alone.
Twitter's stock has not traded at anything like the promised cash payout since the deal was announced. Today, the stock stands roughly 9.5% below the buyout offer. In other words, many investors worry that the deal will be tripped up before closing. That risk is included in the market price.
Of course, I could be wrong. If you're sure that Twitter will be in Elon Musk's pocket by the end of the year, a 9.5% merger arbitrage return is nothing to sneeze at. I'm just happier on the sidelines as Musk's Twitter drama plays out.
