Twitter Inc.’s next chief financial officer will face a significant debt and interest burden after Elon Musk’s $44 billion deal to acquire the social media platform closes, a challenge that comes as economic headwinds mount.
Mr Musk on Thursday fired Ned Segal, a former investment banker who has served as chief financial officer since 2017, and other executives, the Wall Street Journal reported, citing people familiar with the matter. It is not yet clear who will succeed Mr. Segal as CFO. Twitter and Mr. Musk did not respond to requests for comment on Friday. Mr Segal tweeted on Friday that “the work is not done yet”, referring to Twitter’s ambition to build “the world’s marketplace”. Mr. Segal did not respond to a request for additional comment.
Regardless of who will head Twitter’s finance department going forward, the privatization will leave the San Francisco-based company with $13 billion in debt, along with new costs to pay off those loans.
According to data provider S&P Global Market Intelligence, Twitter’s net debt totaled $596.5 million as of June 30, the most recently reported period, compared to a negative balance of $2.18 billion in the same period last year. Cash and cash equivalents were $2.68 billion, down 35% year over year, the filings show. Negative net debt usually indicates a company has more cash than it owes, a sign of financial strength. The company is expected to be delisted from the New York Stock Exchange on November 8th.
Ned Segal in March. Mr Segal tweeted on Friday that “the work is not done yet”, referring to Twitter’s ambition to build “the world’s marketplace”.
Photo:
David Paul Morris / Bloomberg News
Analysts estimate Twitter’s annual interest payments at more than $1 billion, based on terms previously set out in documents related to the Mr. Musk transaction. The company, which is involved in the social media industry among other things, is also struggling with declines in digital advertising revenue as the economy slows.
Twitter’s debt ratio is likely to increase to six to eight times earnings before interest, taxes, depreciation and amortization based on new debt from the deal and recent earnings, said Rohit Kulkarni, managing director of equity research firm MKM Partners LLC. That’s an increase from June 30’s simple Ebitda — the latest available date — according to data from S&P Global Market Intelligence.
It could take at least three years for the company to control costs and improve profitability to bring that ratio to a more manageable level, which would be roughly twice Ebitda, Mr Kulkarni said. “The leverage ratio will be quite significant because this company has invested more over the past 24 months by hiring people and investing in new products,” he said.
According to financial research firm Bespoke Investment Group LLC, the average net debt-to-Ebitda ratio for S&P 500 companies is 2.7, compared to 2.9 a year ago.
Ratings firm S&P Global Ratings said Mr Musk’s acquisition of Twitter is likely to result in a several notch credit rating downgrade, a forecast it released in April. S&P Twitter’s BB+ credit rating has remained on credit watch with a negative outlook since July. S&P will assess increased financial risk due to deteriorating economic conditions and negative publicity about the merger dispute, said Scott Zari, an associate director at S&P.
“This new capital structure is likely to basically double the debt, with falling Ebitda leading to a recession,” Mr. Zari said, adding that advertisers tend to pull back spending in a downturn. “We believe this will be a significant increase in leverage.” Moody’s Investors Service, another rating agency, put Twitter’s Ba2 rating on review for a downgrade in April after Mr. Musk agreed to purchase it. Fitch Ratings does not rate Twitter.
““If you take on this role, you have a 10,000-piece jigsaw puzzle. It’s going to be difficult.””
The new CFO’s priorities will largely depend on whether Mr. Musk guides the company toward growth by building new businesses, possibly as part of the platform’s evolution into an all-app, or toward profitability by cutting costs, which is unclear, they said analysts. Mr. Musk has said that buying Twitter would speed up its development of an app that combines the capabilities of multiple apps into one.
The new CFO is likely to help turn debt holders into shareholders, possibly by offering them sweeteners like warrants, and seek to inject more cash into the company to pay down debt, said Youssef Squali, senior internet analyst at Truist Securities, a financial firm -Service company.
The chief financial officer also needs to navigate Mr Musk – who previously threatened to walk away from the deal before changing his mind – and make sure he stays focused on Twitter while juggling his other duties as CEO of automaker Tesla hat brings inc
and rocket company Space Exploration Technologies Corp., said Brent Thill, senior analyst at Jefferies Group LLC, a financial services firm. “If you take on this role, you have a 10,000-piece jigsaw puzzle. This is going to be tough,” said Mr. Thill.
Twitter had 7,500 full-time employees at the end of 2021, up from 5,500 a year earlier.
Photo:
Michael Dwyer/Associated Press
The new CFO could also focus on cutting costs, potentially reducing the company’s real estate footprint while laying off employees, said Brian Fitzgerald, a managing director of Wells Fargo Securities LLC. Mr Musk’s lawyers have hinted at possible layoffs and Mr Musk has not ruled them out in talks with employees over the past few months, the Wall Street Journal previously reported.
Twitter will have to cut about 30% of its workforce to get costs under control, although Mr Musk has previously hinted a more drastic purge could be coming, said Dan Ives, an analyst at Wedbush Securities Inc., a financial services firm. “There’s a massive job cut coming for a company that was already bloated,” Mr Ives said.
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The company had 7,500 full-time employees at the end of 2021, up from 5,500 a year earlier, filings show. Its costs and expenses totaled $1.52 billion for the quarter ended June 30, compared to $1.16 billion for the same period last year. Twitter’s revenue declined 1.2% to $1.18 billion, and general and administrative expenses rose 53.1% in the quarter compared to the year-ago period.
The $44 billion price tag is nearly double Twitter’s estimated fair market value, making it the most overpriced tech acquisition since Time Warner inc
$100 billion merger with AOL more than two decades ago, said Wedbush’s Mr. Ives.
The future leaders Mr. Musk deploys must share his vision for Twitter, Mr. Ives said, and prepare to support growth initiatives that will take years to build.
“This will be a Herculean effort to turn Twitter around after it’s been on a treadmill for the past decade,” Mr Ives said.
—Jonathan Randles and Nina Trentmann contributed to this article
write to Mark Maurer at [email protected] and Dean Seal at [email protected]
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