Thunderclap after the thunderclap last week: after announcing with a bang the cash takeover of Twitter for the tidy sum of 43 billion dollars, Elon Musk backtracked on May 13 and made a big splash by putting the deal paused, citing the uncertain number of fake accounts and bots on the platform.
As Bloomberg suggests, it is quite possible that these bots and fake accounts are not the real problem, if not for Musk, at least for Twitter. Thus, according to the American media, the assembly created from scratch for the boss of Tesla and SpaceX by its partner banks would cause Twitter a debt from which the company would have all the difficulty in the world to extract itself.
“It’s just the wrong capital structure to go after a business like Twitter, which has never really proven to be profitable. explains John McClain, portfolio manager for Brandywine Global Investment Management. It’s been a listed company for a while and it seems to have never really figured out how to monetize its audience.”
But while growing the user base and monetizing it is one of Musk’s very optimistic top priorities, it might not be enough to support the huge debt that the set-up places on Twitter’s shoulders.
As Bloomberg details, this debt is one of the three components of the deal concocted by Musk’s bankers, with the $27.25 billion raised from other investors and $6.25 billion backed by his Tesla shares. He is also seeking to replace this risk-taking by the arrival of other outside financiers, probably aware that the game might not be worth the candle.
The debt that this deal would bring to Twitter drastically changes the situation for its accounts: the firm, which had to pay 53 million dollars in interest for the year 2021, could see this sum jump to nearly 900 million dollars in 2022 if Musk’s edit comes to fruition.
The company, which is a priori preparing to announce rather decent results, could therefore resume burning cash at a rate that is difficult to sustain, except to drastically increase the monetization of its subscriber base – and therefore its income – in the coming months.
This is certainly Musk’s bet, but it seems more than daring: he himself foresees a long and severe recession in the United States, and the tech sector is already going through a major slump; two phenomena that would make an immediate increase in profits difficult to achieve.
Twitter could therefore find itself permanently with an unbearable burden on its back and, after having glimpsed the best, plunge back into the worst to once again become a start-up that burns cash much, much faster than it enters.
The question of bots, which gave rise to a rather acrimonious – or more exactly scatological – exchange on Twitter between Musk and the current boss of Twitter, Parag Agrawal, will then be very largely secondary.
— Elon Musk (@elonmusk) May 16, 2022
Yet, despite this grim prospect of unsustainable debt, and after an initial reaction that consisted of a poison pill intended to reject Musk’s offer, the firm’s board of directors now seems to be eager for Musk to complete his adventure, probably before he tries to renegotiate the terms of the takeover.