The Banks Aren't X-ing X

(WSJ photo)

When Elon Musk bought Twitter in October, 2022, for $44 billion, most financial observers opined that he substantially overpaid for the stock.

Twitter had been a giant in social media. It was unrivaled as the nation's water cooler, where everyone went for the latest news and opinions on the events of the day. Although it attracted millions of eyeballs every day, Twitter couldn't figure out how to monetize the traffic. Neither selling ads or subscriptions generated revenue to justify a $44 billion valuation.

Twitter also came under fire during the Trump Presidency as it began censoring "misinformation" that turned out to be accurate, yet allowed through information that was later shown to be untrue. The bias all went in one direction, against conservatives and for liberals.

Elon Musk believed that he could make Twitter profitable, but I doubt that his primary motivation was investment, i.e., that it would be a slam-dunk turnaround winner. IMHO, his motivation was equally to create one of the few free-speech platforms that would be widely read. Elon Musk also has a provocative streak, and the purchase of an entity that the Progressives thought they controlled was guaranteed to infuriate them. As I wrote last year

Elon Musk's current net worth has been estimated at $241 billion. His purchase of Twitter was, IMHO, for both investment and personal enjoyment, and he seems to be deriving immense pleasure from seizing control of the Progressives' playground and reminding them daily that he has it. Losing 11% of his net worth on something that interests him is not the best outcome, but he can afford it.

Nearly two years after Twitter (rechristened "X") was taken private, the Wall Street Journal reported on X's financial status:

The $13 billion that Elon Musk borrowed to buy Twitter has turned into the worst merger-finance deal for banks since the 2008-09 financial crisis...

The banks that agreed to underwrite a deal that even Musk said was overvalued did so largely because the allure of banking the world’s richest person was too attractive to pass up, according to people involved in the deal. Musk and other investors ponied up around $30 billion to buy the company, giving the banks some cushion in case things were to go wrong.

The banks—which also include Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho and Société Générale—have been able to collect hefty interest payments from the X loans. They are generally for seven to eight years and carry rates several percentage points above the benchmark for investment-grade companies. And the banks could still ultimately be made whole if X is able to cover its interest obligations and repay the principal when the loans mature...

But nearly two years after Musk’s acquisition, X’s business is still struggling to climb out of the deep hole it fell into under his ownership—the company last year said its value had fallen by more than half, to around $19 billion.

While data indicate that use of the app rose amid the explosion of political news in recent weeks, there isn’t evidence that that is translating to a meaningful recovery in the advertising revenue that long sustained the revenues of the company, which pre-Musk struggled to maintain profits. Musk has gone from telling advertisers who fled the platform to “go f— yourself” to suing them and a trade group this month, claiming they illegally conspired to boycott X. The group has said it plans to rebut the claims in court.

Servicing the loans isn’t helping X’s financial health. Even before rates stopped rising, Musk said its annual interest payments total around $1.5 billion.

Banks typically have a number of legal ways to force X to make good on principal and interest. However, IMHO, they're being patient because they have their eyes on a bigger prize--upcoming financing and/or public offerings involving SpaceX, Tesla, and other Musk-controlled entities.

The deal presents a Catch-22 for the banks. On one hand, they are eager to be well-positioned to work with Musk and his six companies that range from electric-vehicle maker Tesla to Neuralink and xAI. Many view a possible initial public offering of Musk’s rocket company SpaceX or his Starlink satellite business as a fee-generating event that they don’t want to miss out on.

Elon doesn't forget those who stuck by him and who crossed him.