Elon Musk’s acquisition of Twitter Inc. could go down as the worst leveraged buyout (LBO) deal for a bank since the 2008 global financial crisis, in the latest worrying sign that the deal is proving costly for Tesla Inc. shareholders.
More than half of the $44 billion purchase price came from Elon Musk, but about $13 billion had to be raised from a consortium of lenders to avoid burdening Tesla shareholders after he sold billions of dollars in Tesla stock.
Typically, Wall Street banks underwrite the debt financing of a major deal and then, over the course of weeks or sometimes months, package and sell that debt to professional investors such as hedge funds and pension funds.But the poor timing of the Twitter deal in October 2022, which came just as borrowing costs were beginning to soar, combined with the social media company’s dire financial situation, discouraged asset managers.
Nearly two years later, investment banks have been unable to get rid of the debt, tying up valuable capital and limiting their ability to generate and raise more deals. In fact, LBO debt hasn’t remained on balance sheets for this long since the collapse of Lehman Brothers, according to new information from PitchBookLCD cited by The Wall Street Journal on Tuesday.
The previous record was 13 months in 2007, when private equity firm Cerberus bought auto parts group Tower Automotive at the peak of the subprime bubble.
The data doesn’t provide any indication of whether Company X breached its loan agreements — typically the first sign of financial trouble — and the company did not respond to Fortune’s request for comment.
But reports in recent months have suggested that Musk has repeatedly sought to ease bankers’ concerns while pushing for less onerous terms.
Unsustainable debt
When the deal closed, Twitter was expected to incur more than $1 billion in annual interest before capital and operating expenses. That’s problematic given that revenue from its main U.S. market is expected to reach roughly $600 million this year and that Twitter was struggling to monetize its user base even before the Musk acquisition.
Fortune magazine reported in October that Musk had held multiple talks with bankers about restructuring the company’s debt to reach more financially sustainable terms.
But those talks have stalled, according to The Wall Street Journal. It’s unclear whether X is currently paying off its debt, but reports from at least one bank say this is affecting their bottom line.
Largely due to Twitter’s LBO debt, Barclays’ senior M&A team was told last year that their annual compensation would be cut by 40% from the previous year. The cuts were so severe that almost a quarter of the bank’s more than 200 directors resigned after receiving their payouts.
Musk may still perform miracles, but Tesla bulls are growing alarmed by X’s financial woes. Last week, Halter Ferguson Financial warned that Musk may be forced to sell $1 billion to $2 billion worth of Tesla stock to plug the financial gap at Twitter (now X) with a new infusion of loss-absorbing capital.
Fortune has reached out to Barclays and Tesla for further comment.
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