Last week everyone’s fave attention-junkie technology impresario launched a $43bn hostile offer for Twitter. It has raised Questions, to put it mildly.
Apart from the company likely not wanting to sell at just $54.20 per share, a big challenge to Elon Musk’s bid is that the company is not exactly the profit machine that debt and equity partners would readily want to get behind in a blockbuster buyout.
In 2021, Twitter’s adjusted Ebitda margin was just 13 per cent. In a research report last week, the respected firm MoffettNathanson implored Twitter shareholders to simply “take the money and run”. Its recommendation stemmed from Twitter’s history of disappointing margins, and little prospect of a turnround with present management and strategy.
However, MoffettNathanson believes that in a best-case scenario Twitter could conceivably hit 25 per cent Ebitda margins. What if the smartest private capital firms in the world could achieve this, and convince lenders to underwrite such a business plan?
Using MoffettNathanson’s target as a foundation, FT Alphaville built a basic LBO model to see if such a forecast could be the basis to make the numbers work on a leveraged buyout.
An LBO capital structure tries to maximise the debt a business can take on, relative to the cash flow needed to both run the business and pay both interest and ideally some debt principal.
First before we get into the analysis, a few of our basic assumptions:
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For simplicity, we assume just a single tranche of debt with a blended interest rate of 10 per cent. (The roughly $15bn figure, 8x Ebitda, matches what the FT reports Wall Street is indicating is feasible between debt and preferred stock)
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Revenue forecasts come from CapitalIQ consensus estimates. An Ebitda margin of 25 per cent is then applied to those revenue forecasts
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Free cash flow conversion to net income assumed to be 100 per cent for simplicity.
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Elon Musk’s existing stake 9.1 per cent stake is rolled into the private company
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Assumes a 12/31/2022 transaction close
Here is the transaction summary:
Here is the sources and uses table:
Here is the income statement:
Here is the cash flow statement, debt paydown schedule and credit statistics:
And, last but not least, the equity returns:
Even assuming that the deal gets priced off a theoretical 25 per cent Ebitda margin in 2023, the $54.20 purchase price implies a whopping 22.7x Enterprise value/Ebitda multiple. As such, the deal requires nearly $24bn in equity against just $15bn in debt (a more typical LBO would reverse those splits).
Still, the revenue growth and 25 per cent Ebitda margin is enough for a 5-year IRR of 19.9 per cent, a healthy return on such massive amount of money deployed.
Can Elon, between his own wealth and powers of persuasion, find nearly $25bn of equity to get to “funding secured” status? The returns maths might just work.
But we suspect a lot of firms would be most interested in being lenders at the top of the stack clipping 10 per cent coupons and pocketing various fees. Plus a 25 per cent Twitter Ebitda margin may obviously be the stuff of fantasy.
Let us know your thoughts on our model and what inputs and assumptions you find most crucial.