Twitter Has a Lot of Debt. It’s Not an Issue for Tesla—Yet.

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Elon Musk had a bad weekend and that could pose problems for Twitter—and, by extension,

Tesla

stock. 

Musk’s first weekend as the owner of Twitter was just about as messy as his takeover of the company was. He posted a conspiracy theory about the attack on Paul Pelosi before deleting it, something that is unlikely to please either those on the right or the left. He fired Twitter’s CEO and other management, as was his prerogative, and the board of directors as well.

But the one thing that really mattered for the future of Twitter was

General Motors

‘ (ticker: GM) decision to pause advertising on Twitter until after it sees how new management handles the situation.

That’s because Twitter is dependent on advertising to pay the bills, including the interest on all the debt that Musk took on to pay for the acquisition. Interest expense will balloon to more than $600 million from roughly $60 million paid over the past 12 months after Musk used approximately $13 billion in bank debt to complete his buyout, and Twitter had about $5.5 billion of debt before the deal, for a new, consolidated, total of $18.5 billion. That’s an enormous amount of debt for a company expected to generate just $1 billion in 2023 earnings before interest, taxes, depreciation, and amortization, or Ebitda.

Comparing debt to Ebitda is a good way to consider how easily a company can cover the interest payments, as well as the regular everyday spending, that is needed to maintain and expand the business. S&P 500 companies typically operate with debt to Ebitda ratios below 2 times. Accounting for Twitter’s roughly $6 billion in cash and securities on hand, Twitter has a ratio of about 12 times after Musk’s acquisition. 

Musk has other ways of bringing that ratio down. He’s already said to be considering mass layoffs—not 75% of the staff, as had been reported, but perhaps a quarter or even half of it—which would reduce the $4 billion-plus in operating expenses Twitter pays each year. 

Twitter’s 2021 revenue per employee of roughly $675,000 is lower than

Snap

(SNAP) which ended 2021 at about $730,000.

Meta Platforms

(META) 2021 revenue per employee came in around $610,000, but Meta is a tough comparison. It’s 15 times the size of Twitter. 

If Ebitda falls too low, Musk will be left with a difficult choice to put more cash in to shore up the entity’s balance sheet or to put his initial equity investments at risk. Musk, of course, doesn’t have to put in more cash, even if it meant losing all of his initial investment. But as the majority owner, and with a $200 billion-plus fortune, other Twitter investors—

Oracle

(ORCL) chairman Larry Ellison and the Qatari sovereign-wealth fund, among them—might look to Musk to bail them out if things go south.

“We do not believe more capital would be needed,” says Wedbush analyst Dan Ives. “If it was, Musk would likely be the one writing the check.”

Any buzz like that means that investors would have to worry again about Tesla stock (TSLA). Musk’s only source of ready cash is from selling Tesla shares, something that likely weighed on the stock as it fell 37% from Apr. 1, 2022, just before Musk’s Twitter stake was disclosed, into deal closing, while the Nasdaq composite fell 22% over the same span.

And it shouldn’t come as a surprise that Tesla stock rose 6.6% this past week while the S&P 500 and

Nasdaq Composite
rose 4 % and 2.2%, respectively, as Musk completed the deal if for no other reason than Musk could stop selling. If Musk were to start selling again—or even if it appeared he might have to start selling again—Tesla stock could slip. And the more it slipped, the more stock Musk would have to sell, potentially creating a vicious cycle of selling. 

So far though, that doesn’t seem to be an issue. Since Twitter is now privately held, we no longer look to its stock to see how it’s performing. The company’s original bonds, however, are trading at 100 cents on the dollar, which means that those bondholders feel fine—they know they will get paid back before the debt Musk took on to close the Twitter deal. On Monday, Tesla stock is up 0.4%, to $229.56, while the S&P 500 and Nasdaq are down 0.4% and 0.6%, respectively. That outperformance suggests that the market isn’t worried about the deal just yet, especially since the stock has also been about to hold above support at around $200.

Tesla shareholders can keep calm and carry—for now.

Write to Al Root at [email protected]