An open letter to Elon Musk:
Don't do this. Twitter (TWTR) is not the hill to die upon.
I always have felt a kindred spirit with you. We were both born in 1971, both have devoted an important part of our lives to the automotive industry (I was a sell-side autos analyst for a decade) and both of us realized long ago how much the auto original equipment makers needed a kick in the pants. You are giving them that in spades with Tesla (TSLA) . We both also care about the tyranny of Big Tech. Tweeting the Pregnant Man emoji at Bill Gates was awesome, by the way.
I agree with your recent tweet. What Twitter did to the New York Post story on Hunter Biden was unconscionable, and I noted that at the time in my Real Money column. But, pointing out TWTR's flaws and taking over the company are two very different things.
Leveraged deals suffer in rising interest rate environments. That Twitter's board would agree to sell to you at a price that is 26% below where it was one year ago might show how clueless they are, though it also could how little faith Twitter insiders have that the financial situation at the company will improve. They had time to shop this thing via Goldman (GS) and J.P. Morgan (JPM) . Why did no other bidders emerge at such a steep discount to recent highs? Ask yourself that question. Please.
You are being fed a line of b.s. by Morgan Stanley (MS) . The deal, as currently constructed, cannot possibly work, especially in an environment of rising interest rates. The numbers simply don't add up.
You can read all the details in my latest report for OHM Research, but the math is unquestionable. Even if we omit the $766 million charge to earnings that Twitter took in the fourth quarter for settling litigation stemming from management, led by @jack, lying to investors about user engagement, Twitter's 2021 EBITDA was only $832 million. Twitter's capex was just over $1 billion last year.
But with a $12.5 billion margin loan and $13 billion (including the revolver) in new debt -- all of which have variable interest rates that will jump next week after the Fed meeting and will keep jumping all year -- I calculate the annual interest burden for X Holdings at just under $2 billion. So, under $1 billion in annual EBITDA, over $1 billion in annual capex and $2 billion in annual interest expense. That's more than $2 billion in annual cash shortfall.
Guess who they will come to in order to plug that hole?
If Twitter goes the way I am projecting -- and any sentient, non-Morgan Stanley-employed human being would agree -- you would need to shore up the financing, either from your own wallet or via even more debt. Debt is marginally more expensive with a hawkish Fed and a scared-witless bond market, and ultimately people are going to look at your holdings of Tesla as the golden goose. As I am sure you are aware, the $12.5 billion margin loan only encumbers about 1.5% of your Tesla shares; just make sure that Morgan Stanley and the rest don't come after the other 98.5%.
Pay the $1 billion break-up fee and know that your message has been received loud and clear by Dorsey, Agrawal and every Twitter stakeholder. Let them break down in tears in management meetings and know that their reign of error has been disrupted --.by you. You made a difference at Twitter. Full stop
Just remember the approximately 100,000 employees at Tesla and the millions more at your suppliers such as CATL, Panasonic and so many others. So many people depend on you. Remember what happened when you sold Tesla shares to pay taxes after converting old stock options in the fourth quarter of 2021. I am sure TSLA's selloff didn't make your employees happy.
You have made your point, and did so very convincingly before you even reached the ownership disclosure threshold at Twitter. Walk away. The folks at Tesla, SpaceX, The Boring Company and Neuralink will be glad that you did.