Elon Musk's Twitter Sits On A Debt Pile — Could The Problem Trickle Down To Tesla?

Elon Musk officially acquired Twitter last week and as the initial euphoria settles down, it could be time for the billionaire and other stakeholders to sit back and take stock of the situation.

Twitter’s Interest Outgo To Swell: The interest Twitter would be required to pay on its debt is likely to balloon 10-fold, from $60 million over the past 12 months to $600 million, Barron’s said in a report. This increase reflected the $5.5 billion debt that currently stands on Twitter’s balance sheet and the $13 billion in bank financing Musk availed of to fund the deal, Barron’s added.

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The new consolidated debt, according to the report, is $18.5 billion as opposed to the $1 billion in earnings before interest, taxes, depreciation and amortization, or EBITDA, the company is expected to generate in 2023.

After adjusting for the $6 billion cash Twitter has in its balance sheet, the social media platform’s EBITDA has risen 12 times following the deal. This is markedly higher than the typical debt-to-EBITA ratio below two times for S&P 500 companies. 

How Musk Can Rein In The Debt: Musk has the option to bring down the outsized debt-to-EBITDA ratio, Barron’s said.

The billionaire is rumored to be contemplating a plan to eliminate about 75% of the Twitter workforce. If he implements even a quarter of the speculated cutbacks, he would be saving over $4 billion of the operating expenses per year, added the report.

Another option before the Tesla Inc. TSLA CEO is to grow the top line. After reports suggested that Musk could announce a hike in the blue badge verification fee to $20, he chimed in.

We need to pay the bills somehow! Twitter cannot rely entirely on advertisers. How about $8?

— Elon Musk (@elonmusk) November 1, 2022

How Tesla Is At Risk From Twitter’s Debt Pile: If Twitter's EBITDA falls way too much, Musk has to increase the equity component of the balance sheet, Barron’s said.

Since Musk’s wealth is concentrated in his Tesla stock holding, the only way to raise equity capital, if at all it is warranted, is to sell the EV maker's shares.

Alternatively, Musk can bank on other Twitter investors such as Oracle Corp’s ORCL Chairman Larry Ellison and the Qatari sovereign wealth fund to bail out Twitter, the report added.

Since Tesla shares have outperformed the broader market in the sessions following the announcement of the deal, it appears that investors in Musk’s flagship EV company, for now, are comfortable about their capital being preserved.

Price Action: Tesla shares closed Monday’s session down 0.43% at $227.54, according to Benzinga Pro data.

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