In a corporate saga reminiscent of a high-stakes thriller, Elon Musk, the enigmatic CEO of Tesla, plunged into the tumultuous world of social media with his $44 billion acquisition of X—formerly known as Twitter. This dramatic move, executed in October 2022, sent ripples through the banking landscape, morphing into a labyrinth of financial woes for the seven banking titans who extended him $13 billion to seal the deal. Notably, these institutions include heavyweights like Morgan Stanley and Bank of America.
Yet, as the dust settled, what appeared to be a bold leap for freedom swiftly transformed into a treacherous quagmire for the bank’s balance sheets. According to a scathing report from the Wall Street Journal, this loan has turned into the most catastrophic merger-financing debacle since the financial storm of 2008, gripping the banks in a stranglehold of “hung” debt.
The typical narrative for banks involved in takeover financing is one of swift exits. Once the deal is done, they quickly offload the debt to investors such as hedge funds or pension plans. However, in this case, X—battered by disappointing financial performance—has left the banks in a precarious position, clinging to loans that have become as immovable as a boulder on a mountain peak. Consequently, these entities are feeling the brunt of substantial write-downs, casting shadows on their profitability.
The Wall Street Journal’s investigation reveals an unsettling trend; the loan tied to X is festering on the banks’ ledgers, lingering longer than any unsold merger debt since the financial upheaval more than a decade ago. Intriguingly, the banks opted to back Musk’s acquisition despite his candid admission that the price was inflated, perhaps due to the allure of securing a deal with the world’s wealthiest individual.
Despite the substantial interest payments flowing in from X, Musk’s brainchild is struggling to find its footing. It’s been reported that the platform’s market value plummeted over 50% to a mere $19 billion last year, raising alarms about its long-term viability. Diving deeper into the financial abyss, X’s anticipated annual interest expenses are expected to surpass $1 billion, even while projections hint that revenue might barely scrape $600 million this year.
The stark reality paints a dire picture: Struggling to monetize its extensive user base even before Musk took the reins, X now appears ensnared in an insurmountable financial vortex.
As if tethered to a sinking ship, Musk also attempted to reconfigure the debt. Unfortunately, these negotiations stalled comically, leaving prominent lenders like Barclays in a tough position. The repercussions were severe; members of the mergers and acquisitions team at Barclays faced drastic pay cuts of 40%, prompting an exodus of over 200 employees, the weight of X’s debt suffocating their financial aspirations.
Amid these challenges, repercussions echo to Tesla’s realm, striking a nerve among its investors. Speculation suggests that Musk might need to liquidate $1 billion to $2 billion in Tesla shares to stave off X’s financial struggles, an action that could set the stage for a ripple effect throughout his vast empire.
So, what does this mean for TSLA? Analysts stand divided, observing from the sidelines with a cautious consensus rating that accounts for 10 Buys, 14 Holds, and seven Sells. With TSLA shares dipping more than 10% year-to-date and an average price target around $211.46 hinting at a 4.4% downturn, the narrative remains uncertain, overshadowed by the spectacle of Musk’s audacious ventures into the digital landscape of X.
