Elon Musk attends the 2022 Met Gala to celebrate ‘In America: An Anthology of Fashion’ at the Metropolitan Museum of Art on May 2, 2022 in New York City.
Dimitrios Kambouris | Getty Images
Elon Musk’s Twitter was sued again in California this week for allegedly failing to pay a vendor.
The latest complaint comes from a tech startup called Writer, Inc., and is at least the sixth company to sue Twitter in the U.S. for breach of contract and nonpayment since Musk took over about four months ago.
The Tesla and SpaceX CEO led a $44 billion buyout of Twitter, which closed around October 27, 2022. He sold billions of his Tesla shares and took on about $13 billion in debt at Twitter when he became sole director, new owner and CEO there.
Since then, Musk’s social media venture has been sued for nonpayment by Writer and at least five others:
- Its San Francisco landlord, Columbia REIT
- A private jet transport service provider, Private Jet Services Group
- An event planning and production company, Blueprint Studios Trends
- An M&A consultancy, Innisfree M&A
- And Analysis Group, a firm that provided litigation-related consulting services to Twitter and its counsel before Musk bought the company.
A legal and public records database, PlainSite, is track these lawsuits as they arise.
Twitter’s alleged failure to pay rent to Columbia REIT has led the real estate company to default on loans for buildings, including where Musk rents office space at 650 California Street in San Francisco, Fortune first reported.
Twitter has also reportedly fallen behind on payments to larger companies. According to a Platformer report on Thursday, Twitter abruptly suspended employees’ access to Slack this week after failing to pay a bill. Slack is the workplace chat and collaboration platform owned by Salesforce.
In the latest complaint, filed in California Superior Court in San Francisco, Writer says Twitter failed to pay a bill for the relatively modest amount of $113,856.
Formerly known as Qordoba, Writer describes itself as an AI company that helps employees create content that meets their employer’s standards for branding, copy and other style guidelines.
Writer did not immediately respond to a request for comment on the matter.
Twitter’s vice president of product, trust and security, Ella Irwin, told CNBC via email, “We do not comment on ongoing litigation or speculation surrounding Twitter’s financial health.”
Musk has publicly lamented and made light of Twitter’s financial woes. This week, he wrote on Twitter, “Say what you will about me, but I acquired the world’s largest non-profit for $44 billion lol.”
Non-payment disputes like these aren’t common after a leveraged buyout, according to Boston College finance professor Edith Hotchkiss. She said in an email to CNBC that they are “more typical of companies that are in a very short window to file for bankruptcy.”
Vanderbilt University finance professor Josh T. White, a former SEC economist, agreed that the actions are unusual, saying that litigation over non-payment of suppliers can result from “improper and aggressive capital structure.”
Musk’s Twitter deal was financed with about 30% debt and 70% equity at closing.
White explained that the high level of debt is aggressive for a company with volatile and sometimes negative free cash flow, which Twitter had experienced for the past three years.
Leveraged buyouts more often target companies with stable cash flows that can be used to pay down debt and generate a tax shield by deducting interest expenses, he wrote.
“Using more debt and less equity reduces the amount of liquid cash that Musk and his equity co-investors had to contribute at closing, potentially generating a higher internal rate of return if the company turns out to be profitable,” White said.
At the same time, even after aggressive cost-cutting measures, incl extensive redundancies and cuts to benefits and infrastructure, Twitter is likely still struggling to generate positive free cash flow to pay its obligations, White suggested. Non-payment and breach of contract are certainly a red flag that the company is likely to be financially distressed.