Elon Musk’s planned acquisition of Twitter looked like the deal of the year back in April. Investment banks and Silicon Valley bigwigs clamored to be a part of it. Moved by his lofty promises and past successes, they collectively promised billions to Mr. Musk, the world’s richest man.
Then Mr. Musk tore it all up. He announced in July that he no longer wanted go through with his bid, and he publicly thrashed the company he had asked for help in buying.
But, on Monday night, Mr. Musk said that he had changed his mind once again and that he still wanted to buy Twitter, a company under more duress than it was in the spring and operating in an economy that looks much shakier.
Now the $44 billion deal — the same amount that Mr. Musk offered in April — could be significantly more costly for lenders like Morgan Stanley, Bank of America and Barclays that committed to put big money into the deal before inflation, rising interest rates, economic uncertainty created by the war in Ukraine and Mr. Musk’s bombastic behavior.
“I’m sure the banks aren’t as hot to do this in October at these terms as they were in April at these terms,” said Michael Maimone, a partner at the law firm Barnes & Thornburg who focuses on mergers and acquisitions.
After Mr. Musk informed Twitter of his new intent to follow through on the deal, the two sides began to hash out the details, with negotiations spilling into Wednesday, said a person with knowledge of the situation who was not authorized to speak publicly about the confidential talks.
A question looming over the negotiations is whether Mr. Musk will try to use the banks’ potential issues with financing to get out of a deal with Twitter, if the company does agree to his new offer. In a letter to Twitter, he said he would complete the deal “pending receipt of the proceeds of the debt financing.”
What Happened to Elon Musk’s Twitter Deal
A blockbuster deal. In April, Elon Musk made an unsolicited bid worth more than $40 billion for the social network, saying he wanted to make Twitter a private company and allow people to speak more freely on the service.
Mr. Musk can walk away from the deal with a $1 billion break-up fee if his debt financing falls apart. While an expensive prospect, it would be far less costly than buying Twitter for $44 billion.
“Financing has always been a bit of a wild card in this,” said Eric Talley, a professor at Columbia Law School. “That’s always been a secret weapon that Musk might have had up his sleeve: that suddenly the lenders walk in and say that we’re not willing to finance it.”
Mr. Musk cobbled together financing through a variety of sources, including his own money. He raised $12.5 billion from banks, with Morgan Stanley, Bank of America and Barclays each committing to $2.5 billion. Other banks, including BNP Paribas and Mizuho, have committed to smaller amounts.
Typically, when investment banks fund a leveraged buyout, they try to offload that debt to outside investors, such as hedge funds and other big institutions. The banks make money from the fees they charge to arrange these deals, and they sell the debt to reduce their risks in case borrowers cannot repay what is owed.
It has become significantly harder to sell that debt in recent months, which presents a challenge to the banks. If they try to sell the debt now, they might be forced to do so at a large loss.
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Morgan Stanley, Bank of America and Barclays all declined to comment on Wednesday.
Twitter will most likely try to make sure Mr. Musk cannot use financing problems to back out of the deal again, legal experts said. Twitter sued Mr. Musk in an effort to force him to go through with the initial agreement, and a trial is still scheduled to start in Delaware Chancery Court in two weeks. The company could ask Kathaleen McCormick, the judge overseeing the case, to have the banks put in writing that they remain committed to funding the bid.
Still, the banks could argue that Mr. Musk’s antics over the past few months have materially damaged the business. And Mr. Musk could opt not to sign a requisite letter certifying that Twitter is solvent.
Legal experts said the judge would most likely look unfavorably upon any efforts that could be seen as Mr. Musk sabotaging his own financing. She could also force Mr. Musk to sue the banks under the New York law that governs them, demanding that they follow through on their financing commitments.
“I think the banks will struggle to wiggle out of this,” said Josh White, an assistant professor of finance at Vanderbilt University. “They would, of course, love to.”
If they are kept on the hook for the debt, they could try to sell it, though doing so may be a daunting prospect. In a recent sale of bonds to back the $16.5 billion leveraged buyout of the cloud computing company Citrix, which was seen as a bellwether for the leveraged loan market, banks were forced to take a 16 percent haircut.
The banks could also keep the debt on their balance sheets, just as they were recently forced to do in the $3.9 billion leveraged buyout of the telecom business Brightspeed. They also have not managed to sell the debt of Nielsen Holdings, Tegna or MoneyGram — each subject to a takeover that banks agreed to finance.
Before Mr. Musk’s renewed offer caused Twitter’s stock price to jump 23 percent, Twitter had dropped markedly in value, at times far below Mr. Musk’s proposed purchase price. In April, the average bond with the same BB rating as Twitter’s traded with a yield — an interest rate indicative of corporate borrowing costs — of 5.6 percent. That number is now 7.25 percent.
There is also the remaining roughly $30 billion needed to fund the acquisition that Mr. Musk has promised to the social media company as part of any deal.
In the spring, he said he had raised $7.1 billion from an array of investors including the venture capital firm Andreessen Horowitz and tech moguls like Larry Ellison. It is unclear whether the terms of their agreement with Mr. Musk allow them to back out given the changed circumstances. Representatives of Andreessen Horowitz and Oracle, the company that Mr. Ellison chairs, did not respond to requests for comment.
Mr. Musk has also raised about $15.5 billion in two separate sales of stock in Tesla, the electric car company that he runs and that provides the main source of his wealth. Tesla’s share price has fallen about 37 percent from a high in April.
“This is a giant wealth transfer from Elon Musk and the banks to Twitter shareholders,” said John McClain, a portfolio manager at Brandywine Global Investment Management. “Even if the banks can siphon this off they would be taking a bath on the deal.”