It took a matter of days for Morgan Stanley to corral a syndicate of banks to finance Elon Musk's $44 billion takeover of Twitter.
In just six days, Musk secured $25 billion from lenders — enough money to buy Kellogg Company, the maker of corn flakes, in cash. And he used that financing to make a hostile bid for a money-losing social-media company, despite having no clear plan on how to make it profitable.
To be sure, Musk needed to write a $21 billion equity check and use his Tesla stock to get lenders comfortable enough to provide debt for the deal, three bankers familiar with the financing told Insider. But the allure of dealmaking with the world's richest man, on potentially the most talked-about buyout of the year, trumped the fact he has openly said he doesn't care about Twitter's economics, the bankers said.
"There's a desire to lend to a personality like Musk because banks get a foot in the door with the man and his businesses," one banker who passed on the term loan said. The term loans comprised roughly $13 billion of the debt financing, in addition to Musk's $21 billion in equity, and another $12.5 billion through a margin loan that's secured in part by his Tesla shares.
It's a tale as old as time on Wall Street. Banks leverage their balance sheets to lend billions of dollars to companies in the hope of being part of the next lucrative deal.
And Musk offers plenty of potential pay days for Wall Street.
He owns electric vehicle maker Tesla, worth more than $900 billion, and an active participant in the capital markets. He owns SpaceX, which was valued at $100 billion last October, and could go public one day, and runs The Boring Company, an infrastructure firm worth more than $5 billion.
But in the case of Twitter, the banks are exposing themselves to a company that lacks free cash flow and lost $221 million last year. They are also placing their money on a buyer who risks alienating advertisers, and therefore future revenues. His plans to champion greater free speech on Twitter could see the platform reactivate accounts for controversial figures like Republican Congresswoman Marjorie Taylor Greene, and leave Twitter open to potential hate speech.
Here's what lenders are up against, in a nutshell:
Prestigious deal, but tough sell
On top of Musk's promise for $21 billion in equity, Wall Street banks — from Bank of America to France's BNP Paribas and Japan's Mizuho — provided approximately $25 billion in debt.
While it's a victory for these lenders to get on a Musk-led deal, they still need to move north of $10 billion of this debt off their balance sheets. They'll need to sell the debt to institutional investors in the form of high-yield bonds and leveraged loans.
One potential barrier to this is that Musk, to date, has provided little material information to investors on how he intends to improve loss-making Twitter's financials, and instead has focused on maximizing free speech on the social-media platform.
"It's a prestigious deal, and obviously Musk is a guy you want in your good graces. But this is going to be a hard deal to sell to investors because Twitter generates no free cash flow," a second banker that passed on participating in the term loan explained.
It won't likely help banks that observers have already taken to describing the purchase as nothing more than a billionaire's hobby.
Speaking on NPR Marketplace Morning Report's podcast on Tuesday, Professor Erik Gordon, a clinical assistant professor with the University of Michigan's Ross School, dubbed the deal akin to a "$44 billion sailboat."
Despite Musk's opacity around how he intends to raise his gargantuan equity figure and turn Twitter into a profit-generating company, he has suggested some ways to cut costs at the company, including slashing board members' salaries to $0, a move that would reduce annual costs by $3 million.
And internally, one machine-learning engineer at Twitter told Insider that Musk's takeover could be good for the company because he's pragmatic and understands tech.
Bankers in support of the deal have also noted that Twitter's cash balance of $6.4 billion last year (14.4% year-on-year decline), was enough to service the company's debt for the next five-to-seven years (the life of a high-yield bond and leveraged loan is typically seven or eight years). This is comforting for investors that may be wary of whether or not they will get their money back if they buy the Musk-led Twitter debt.
One banker also touted the sheer size of Musk's equity check as a strong sign of the Tesla founder's commitment to improving Twitter's financials.
"The strength of the sponsorship is incredible, the $21 billion equity check is one of the biggest I've ever seen," this banker said. "Investors will like the insurance of having a deep-pocketed sponsor."
Twitter's board initially didn't want to sell to Musk and even implemented a so-called poison pill to keep him at bay. Once Wall Street backed him, however, they had no choice but to let down the drawbridge and let him take over the castle.
Efforts to find an alternative private-equity investor to Musk came up empty, according to Dan Ives, a tech research analyst with Wedbush Securities. And Twitter's advisors, including Goldman Sachs and JPMorgan, told the company that it would not likely get a better price than Musk's "best and final" offer of $54.20 a share.
The deal could take six months to close, Twitter said in a filing late Tuesday where it revealed a breakup fee of $1 billion if either side backs out, including for failure to secure additional financing in the case of Musk.
Once the deal closes, it should quickly pay off for the Wall Street banks that advised Twitter. Goldman, JPMorgan, and boutique firm Allen & Co., alongside Musk's advisors — Morgan Stanley, BofA, and Barclays — stand to earn up to 3% of the value of the deal in fees, the bankers said.
"For the banks, it's revenue and prestige," a banker participating in the transaction said. "It's a deal we're proud to be associated with."
