PE Deals Misfire; Losses Pile As Tesla CEO’s Musk Takes Twitter Private

Elon Musk’s $44 billion deal to buy Twitter (TWTR) will cause pain in an already crumbling private equity market.

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Musk has sold $15.4 billion worth of Tesla (TSLA) shares to finance the Twitter purchase. But the $44 billion private equity deal also involves $12.5 debt financing from Morgan Stanley (MS), Bank of America (BAC) BNP Paribas (BNPQY), Mizuho Financial (MFG), Societe Generale, Mitsubishi UFJ (MUFG), and Barclays (BCS).

That includes $6.5 billion in riskier leveraged loans, $3 billion in secured bonds and another $3 billion in unsecured bonds.

When markets crash, companies sell at a discount. This might seem attractive for private equity companies looking to buy productive assets at cheaper prices. But the reality is really more mixed, especially when mounting interest rates and possible recession darken the landscape.

In fact Twitter was priced at a premium since it traded at 39 a share on April 1, when Musk announced his initial stake in the company. The Tesla CEO is buying the company at $54.20 a share.

The banks lending the money could be left holding the debt on their books as investors flee riskier debt like leveraged loans and unsecured bonds.

Banks’ Leveraged Loans In 2022

Earlier, Bank of America and Barclay’s  tried but failed to sell $3.9 billion debt from Apollo Global Management’s deal to buy Lumen Technologies‘ (LUMN) telecom and broadband assets; $2 billion of that was leveraged loans while another $1.9 billion was high yield bonds.

The offer was canceled because there were no buyers for the debt.

In January, Elliott Investment Management and Vista Partners acquired Citrix (CTXS) for $16 billion, or $104 a share. It was the first leveraged buyout in 2022 and took Citrix private. Shareholders will receive a cash payout of $104 a share and Citrix will join another Vista company, TIBCO.

Buyouts started facing challenges after the Fed’s Jackson Hole comments on raising interest rates. As the market conditions changed dramatically, banks could stand to lose $700 million from selling $8.5 billion debt at a steep discount in the Citrix deal. They will still own around $6 billion in debt.

2022 PE Deals

After 2021’s highs in private equity (PE) activity, deal flows have been slower this year, though still higher than the pre-pandemic years. In 2021, assets under management exploded for top publicly listed PE firms Blackstone, Apollo, KKR and Carlyle. Top buyouts closed successfully. In October 2021, Thomas Bravo took Stamps.com private for $6 billion with additional debt financing from Blackstone, Ares, PSP Investments. Shareholders received $330 per share in cash in the deal.

Overall, venture capitalists have added fewer companies to their portfolio this year. Deal count has halved to an estimated 4337 after 2021’s heady 9,171. Deal value hit $1.2 trillion last year and is expected to moderate to $529 billion.

Loans for leveraged buyouts in particular are over 500 basis points above the secured overnight financing rate now and are expensive.

Take-private deals total $58.6 billion and include Patient Square Capital’s successful purchase of SOC Telemed for $301.5 million. Shareholders were paid $3 in cash. Altaris Capital Partner’s purchase of Intricon for $240 million priced the company at $24.25 a share.

Digitalization drove PE deal flows in information technology. Fintech companies for online transactions, data analytics and network security companies saw increased deal activity. Thomas Bravo acquired Bottomline Technologies for $2.6 billion. Integrum Holdings acquired eMerchants Solutions for $290 million.

AE Industrial Partners acquired a majority interest in Firefly Aerospace, a launch and in-space vehicles maker.

Private Equity Debt On Banks’ Books

The private equity wing of Elliott Management will also have debt from a $16 billion buyout of  Nielsen, a television ratings company. Citigroup (C) and Bank of America have yet to start the sale of $5.4 billion debt to finance Apollo Fund’s purchase of automobiles parts company Tenneco (TEN). The deal was postponed as borrowing costs surged after the deal was made firm. The Twitter buyout will likely add to this sour climate for deals.

Many of the banks mentioned here are seeing revenue growth in the third quarter due to rising interest rates that offset the slowdown in deals and growth in leveraged debt.

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