The Twitter (Leveraged)

Buyout: Is Elon Musk a

Madman or a Genius?
How to Execute the 2nd Biggest LBO of All
Time Without Any PE Firms (???)
The Topic of the Day Week Month Year…
Everyone wants to talk, write, and tweet
about Elon Musk and his offer to acquire
Twitter, so let’s join in.

This tutorial is strictly about the financial

aspects of the deal, not the regulatory,
legal, free speech/censorship/other
concerns.
The Topic of the Day Week Month Year…
If you want this tutorial in writing, the
Excel model, and the supporting
documents with highlights, go to:

https://www.mergersandinquisitions.com
/twitter-buyout/
The Topic of the Day Week Month Year…
I’ll give you a very quick answer about
whether this deal works, and then we’ll
focus on a few specific parts of it.

Other analyses appear to be from people

who did not read Twitter’s filings, the
deal documents, etc., so I want to correct
that here and go into more detail.
The Short Answer…
• This deal is not completely crazy, but it is quite risky, and even
if it “performs well,” Elon will struggle to achieve the normal
20% IRR target over a 5-7-year period

• Best Case: Perhaps a 20-25% IRR if all the stars align

• Most Likely Outcome: Something in the 10-15% range

• Worst Case: He loses 90%+ of his invested equity in the deal,

producing an extremely negative IRR

• Why: Each part of this deal has many problems…

The Short Answer…
• KEY PROBLEM #1: The EBITDA Purchase Multiple is over 50x,
far above almost any other social media/networking co. (and
even the FY 2022 multiple is ~28x!)

• KEY PROBLEM #2: Twitter’s cash flows are “spotty” and

cannot cover the interest on the $25 billion of Transaction
Debt (16x EBITDA!), let alone the principal repayments

• KEY PROBLEM #3: For the numbers to work, Twitter’s revenue

growth and/or margins would have to expand significantly

• KEY PROBLEM #4: An M&A exit is not possible, and the exit
multiple and timing in an IPO are highly uncertain
And the List of Problems Goes On…
• $12.5 billion “Margin Loan”: Secured by Tesla shares, so what
happens if TSLA’s stock price falls even more?

• Legal/Regulatory: The deal is unlikely to be blocked, but

Twitter has a huge range of ongoing legal issues and possible
settlements and other penalties

• Employees: They don’t seem to like this deal, so will key

employees leave? How many could Twitter afford to lose?

• Employees: On the other hand, Twitter is bloated and poorly

run vs. other tech companies, so maybe some attrition is good
Twitter Buyout: Lesson Plan
• Part 1: Information Sources and Model Approach 8:12

• Part 2: Purchase Assumptions and Leverage 10:31

• Part 3: Operating Cases/Scenarios 14:46

• Part 4: Cash Flows and Debt Repayment 17:36

• Part 5: Exit Assumptions 23:51

Part 1: Information Sources & Model Outline
• MAIN: The Twitter 10-K, its Q1 Earnings report (since the deal
will only close toward the end of 2022), the merger
agreement, and the financing description

• Time Required: Depends how much you want to use the real
deal documents and how much of an LBO model template you
start with (few hours up to several days)

• Model Type: We suggest a simple, “cash flow only” LBO model

because the full 3 statements add nothing

• And: Beyond the Debt Schedule and maybe a Net Operating

Loss Schedule, most others are unnecessary
Part 2: Purchase Assumptions and Leverage
• Share Count & Options: Used the merger agreement and 10-K
for these – seem to be slightly different than other sources

• Elon’s Rollover Stake: Around 9-10%, but it’s unclear what his
cost basis is , so we’re using $35.00 to represent Twitter’s
share price in the Jan – March time frame

• Leverage: Exceptionally high at 30x historical EBITDA and 16x

projected, but this is what the documents give us

• Debt Terms: Straight from the financing doc, where possible

(simplifying / guesstimating parts, like the overdraw fee)
Part 2: Purchase Assumptions and Leverage
• Excess Cash: Yes, Twitter has $6.4 billion currently, which is
likely far above its true minimum

• But: We can’t assume that much of it funds the initial deal – if

we do, the company runs into issues later due to the interest
payments, Debt amortization, and cash flow sweep

• So: Even with some Excess Cash used and the rollover of Elon’s
~9% stake, it’s still probably an additional $19 – 21 billion of
Investor Equity (Cash) to fund this deal
Part 3: Operating Cases/Scenarios
• Approach: Start with the “consensus” numbers for Twitter
based on research analysts’ forecasts and then move up or
down from there

• Here: We also create “Margin,” “Growth,” and “Downside”

cases, all based on different assumptions for user growth,
average revenue per user (ARPU), and margins

• IDEA: Facebook [“Meta Platforms”] is the best in terms of

users, ARPU, and margins; other cases are “discounts”

• Also: Each case will use a different exit multiple because

higher-growth companies tend to trade at higher multiples
 Part 3: Operating Cases/Scenarios
FY 27 Figure: Growth Base Margin Downside

Monetizable Daily
▪ 493 million ▪ 368 million ▪ 318 million ▪ 275 million
Active Users (mDAU)

mDAU CAGR ▪ 16% ▪ 11% ▪ 8% ▪ 5%

Average Revenue per

▪ ~$37 ▪ ~$30 ▪ ~$28 ▪ ~$26
User (ARPU)

Revenue ▪ $19 billion ▪ $12 billion ▪ $10 billion ▪ $8 billion

Revenue CAGR ▪ ~25% ▪ ~15% ▪ ~11% ▪ ~8%

Employee Count ▪ ~22,000 ▪ ~12,000 ▪ ~10,000 ▪ ~8,500

EBITDA (Margin) ▪ $3.4 billion (18%) ▪ $3.7 billion (31%) ▪ $3.5 billion (37%) ▪ $1.8 billion (22%)

EBITDA CAGR ▪ ~27% ▪ ~28% ▪ ~28% ▪ ~14%

Likely IRR Range ▪ 20 – 25% ▪ 19 – 24% ▪ 12 – 19% ▪ (17 – 30%)

Part 4: Cash Flows and Debt Repayment
• Analysts: Much of the commentary focuses on Twitter’s EBIT
or EBITDA margins…

• But: Its cash flow profile is also important, and it’s not good
when you remove the huge Stock-Based Compensation (SBC)
add-back and treat it as a normal cash expense

• Also: The company consistently records CapEx > D&A, so that

will drag down cash flows even further

• And: We’re being “generous” here by assuming that the

former SBC is now paid in cash in the form of higher salaries
and is, therefore, tax-deductible
Part 4: Cash Flows and Debt Repayment
• Initial Interest Costs: Yes, SOFR is “low” right now, but interest
rates are rising! We assume an average SOFR of 2.50%

• So: Term Loan + Senior Secured Bridge Loan will have ~$750
million in interest, Margin Loan will have ~$687 million, and
the Unsecured Bridge Loan will have $375 million

• And: There’s $95 million in amortization on the Term Loan and

$625 million on the Margin Loan

• So: Total is ~$2.5 billion of Debt Service vs. FY 23 EBITDA of

$1.9 billion in the Base Case
Part 4: Cash Flows and Debt Repayment
• Result #1: In many of these cases, Twitter has to draw on a
huge amount of its Revolver, such as over $6 billion in the
“Growth” case

• Result #2: Twitter also builds up a significant Net Operating

Loss (NOL) balance in some of these cases because the
Interest Expense turns Pre-Tax Income negative

• Result #3: And stats like the Return on Invested Capital (ROIC),
Debt / EBITDA, and EBITDA / Interest improve by less than you
might expect
Part 5: Exit Assumptions
• TRUTH: No one – not even Elon Musk – is going to “sell”
Twitter for $100 billion to another company in 5-6 years

• Exit Reality: An IPO will be required, which means that he’ll

have to sell his stake gradually over time (probably a minimum
of 3 years, and possibly longer)

• Exit Multiple Range: It’s useful to look at the multiples of

comparable public companies, the company’s historical
multiples, and how Twitter’s growth rates, margins, and
metrics such as ROIC change over time
Part 5: Exit Assumptions
• Supporting Data: We selected 8 comparable social media,
social networking, and “chat” companies

• EBITDA Multiples: 25th percentile to 75th was ~11x to ~26x

based on historical (FY 21) numbers (slightly lower forward
multiples)

• Revenue Multiples: Range was ~4x to ~7x; projected FY 22

numbers were slightly lower

• Meaning: Easier to “see” what this implies if we create a quick

graph with Revenue Growth vs. Revenue Multiples…
Part 5: Exit Assumptions
Revenue Growth vs. Revenue Multiples for Comparable Public Companies
10.0 x

9.0 x
SNAP
8.0 x
MTCH
7.0 x R² = 0.6474
FY 22 TEV / Revenue

6.0 x

5.0 x KOSE:A035720
BMBL
FB
4.0 x PINS

3.0 x

TSE:4689
2.0 x WB

1.0 x

0.0 x
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Projected Revenue Growth Range, FY 22 - 24
 TEV / EBITDA Trading Multiples

0.0 x
50.0 x
100.0 x
150.0 x
200.0 x
250.0 x
300.0 x
2017-03-01
2017-05-01
2017-07-01
2017-09-01
2017-11-01
2018-01-01
2018-03-01
2018-05-01
2018-07-01
2018-09-01
2018-11-01
2019-01-01
2019-03-01
2019-05-01
2019-07-01

Historical Trading Multiples

2019-09-01
2019-11-01
Part 5: Exit Assumptions

2020-01-01
2020-03-01
2020-05-01
2020-07-01
Purchase Multiple
Historical LTM EBITDA Multiples vs. Purchase Multiple:

2020-09-01
2020-11-01
2021-01-01
2021-03-01
2021-05-01
2021-07-01
2021-09-01
2021-11-01
2022-01-01
2022-03-01
2022-05-01
Part 5: Exit Assumptions
• Conclusion: We think an exit multiple close to 50x is
implausible, as Twitter is a worse business than Snap,
Pinterest, and some of the other high-growth ones

• But: Its financial profile does improve considerably over the

holding period, so something like the “Median to 75th
percentile” range of the public comps might be possible

• And: Remember that Facebook, arguably the “best” of these

companies, currently trades at 9-10x EBITDA

• Our Range: 15x to 30x EBITDA in the Downside through

Growth cases
So… What Does All This Mean?
• Elon Musk: Probably knows the deal is financially
questionable, so he’s doing it for “other reasons” (free speech,
societal impact, etc.)

• And: If you’re worth $250 billion like he is, that’s fine – but the
banks and PE firms backing this deal may not stay along for
the ride (note the 3-year maturity of the Margin Loan)

• Also: It might be difficult to find other backers if he doesn’t

want to commit so much of his own net worth to the deal
Recap and Summary
• Part 1: Information Sources and Model Approach

• Part 2: Purchase Assumptions and Leverage

• Part 3: Operating Cases/Scenarios

• Part 4: Cash Flows and Debt Repayment

• Part 5: Exit Assumptions