Schwarzman’s Soirée, The Zazquake & Yaccarino’s War

Welcome to Dry Powder, coming to you live from the easternmost point in the United States. I’m Bill Cohan and I’m happy to report that the clam shack controversy here on Nantucket has long been settled and we’re finally back to the normal swing of things. There might even be a reunion of the formerly feuding billionaires, but this time inside the open and operating—and reportedly quite delicious—restaurant, itself. Will wonders never cease?This August evening, I’m visiting the latest financial trauma in the Twitter saga, which is somehow both unfathomable and entirely predictable. But first…

Steve’s soirée: According to our friends at AirMail, my good buddy Steve Schwarzman is planning a big bash at Miramar, his grand 30,000-square-foot mansion in Newport. Steve bought the home for $27 million in 2021 and has been renovating it ever since. Now the reno appears to be finished and it’s time to show it off to the neighbors. He and his wife, Christine, are hosting a “Housewarming Party” on August 15 for some 200 people, and the ladies are encouraged to wear “Day Dresses and Shoes for the Garden… and Perhaps a Hat” while the men are encouraged to wear “Summer Suits… and Perhaps a Hat as Well.”Schwarzman may have cultivated an avuncular aw shucks public persona beneath his $44 billion fortune, but the guy loves a party. On his 60th birthday, as many of you may remember, he gave himself a monster bash at the Park Avenue Armory. His 70th birthday party, in 2017, was held at his mansion in Palm Beach and included live camels and a performance by Gwen Stefani.He’s got plenty of venues to choose from for parties, of course, including his triplex at 740 Park, his home in East Hampton, his spread in St. Tropez, a beachfront house in Jamaica, and one of his newest acquisitions: Conholt Park, a 17th century estate in Wilshire, outside of London, which set him back about $100 million. (The Financial Times reported this past week that Steve is having problems with the great crested newt there.) According to Steve’s comments to the Newport Daily News, Miramar will one day be put into a charitable foundation and become a private museum “for the benefit of the Newport community and public in perpetuity.” Of course, Steve and Christine also bought a place here in Nantucket, in 2021, on Brant Point, near the Nantucket Harbor, for $32.5 million—at the time the most money paid for a home on the island. (The noted seafarer Dave Portnoy has since surpassed that, spending roughly $42 million on his new pile on the island.) Steve makes an appearance here a few days a year, usually in August. (You will remember I interviewed him last August at the Atheneum, the Nantucket library.) I am told he will be on island today for a charitable event at the Nantucket Golf Club, where he is a member. Although I am not aware of any plans for Steve and Christine to host one of their blowout parties here, I feel fairly certain such an event would be most welcome by all.
Speaking of billionaire birthday parties…: Congratulations also to billionaire David Rubenstein and his girlfriend, Caryn Zucker, who celebrated David’s 75th birthday at his house on Nantucket—which is where Joe Biden stays when he’s on island—in a much more low-key manner than Steve Schwarzman likes to do. He had a small group of friends over for a late-morning Sunday brunch. Happy birthday, David!
And now for a note on Zaz’s disastrous earnings: I think we can all agree it was a rough week for David Zaslav. The WBD stock fell 10.5 percent and now has a handle barely above $7 a share. The WBD equity value is down to $17.25 billion and the company’s enterprise value, including the net debt of $37.8 billion, is now $55 billion. Considering that a bit more than two years ago, Zaz paid roughly $100 billion for WarnerMedia alone (and then merged it with his Discovery Communications), I think it’s safe to say that investors are not buying what Zaz is selling—literally—at least at the moment.Even if you look past the $9 billion write-off of goodwill related to WBD’s linear television networks, I’m struggling to find much optimistic news in WBD’s second-quarter earnings report. Yes, Zaz continued to execute on the mission for which he is being compensated: using WBD’s free cash flow to pay down debt. WBD paid down $1.8 billion in debt in the quarter and also retired $3.4 billion of debt for 76 cents on the dollar, capturing the discount that exists, in part, because the debt carries low-interest rates and has long-dated maturities. (The WBD debt has an average interest rate of 4.6 percent and an average duration of nearly 14 years. Buying that debt back at a discount is smart corporate finance.) WBD also has a $6 billion undrawn revolving line of credit, and its leverage is now down to 4x its last 12 months of “adjusted EBITDA” of $9.3 billion. So the WBD debt story is a good one and creditors have little reason for concern, for now.Equity investors, on the other hand, seem to be worried that Zaz is having trouble delivering on his grand promise. With the possible exception of the 3.6 million increase in WBD’s direct-to-consumer subscribers—a.k.a., streaming services such as Discovery+ and Max—there isn’t much to cheer about. Revenue for the three months ended June was down 6 percent to $9.7 billion. Worse, WBD’s dreaded “adjusted EBITDA” for the quarter was down 16 percent, to $1.8 billion, compared with $2.1 billion for the second quarter of 2023. Nothing seemed to be on the right trajectory in the second quarter. Not the studio division (“adjusted EBITDA” down 31 percent), not the networks segment (“adjusted EBITDA” down 8 percent), and not D.T.C., which had a loss of $107 million compared to breakeven a year ago. Free cash flow tumbled in the second quarter from $1.7 billion last year to $976 million, down 43 percent, although WBD’s cash flow for the first six months of 2024 is up 72 percent over last year, to $1.4 billion, due to a favorable first quarter. What I worry about most for Zaz and the WBD investors is the “adjusted EBITDA” of $9.3 billion. As faithful readers know, I don’t like the metric, which is not GAAP-compliant and is a black box. But let’s give Zaz his “adjusted EBITDA.” The EBITDA guidance for 2023 from Zaz out of the gate was $14 billion. He delivered only $10.2 billion of “adjusted EBITDA” in the end. And presumably, he thought 2024 would be higher than 2023 for sure. Now, halfway through the year, Zaz’s “adjusted EBITDA” for the past 12 months is $9.3 billion. (This relevant disclosure was found in footnote 5 of the press release of the earnings report—and nowhere else, I might add—so not exactly a proud moment.) I worry time is running out for Zaz and his Hollywood experiment. But I do admire, still, his optimism in the face of the sobering second-quarter operating performance. He flew back from Paris, where he’s been hosting a bunch of celebs and prospects during the Olympics, to deliver this upbeat message along with the challenging numbers. “In light of industry headwinds, we have and will continue taking bold steps, like reimagining our existing linear partnerships and pursuing new bundling opportunities, with the goal to get Max on the devices of more consumers faster and at a fraction of the acquisition cost,” he said. “And we are seeing clear evidence that these and other actions we are taking will help drive segment profitability in the second half of the year and into 2025 and beyond.” Rooting for you, Zaz.

And now for the main event…

Blink Twice, Linda…

News and notes on Elon Musk and Linda Yaccarino’s bizarro world “war” on the advertising community.

WILLIAM D. COHAN

I know we’re all drinking from the fire hose of news these days, but I could not let the week pass without exploring the veritable hostage video that landed in my timeline earlier this week: X C.E.O. Linda Yaccarino’s uber-bizarre plea to potential advertisers to return to her platform. Yaccarino, of course, serves at the pleasure of the world’s richest man, Elon Musk, who in October 2022 bought Twitter for $44 billion, using $31 billion of equity, before systematically vandalizing the social media platform. He’s now got his C.E.O. essentially begging advertisers to support X, not long after he told Andrew Ross Sorkin at his DealBook conference that these prospective commercial partners could go “fuck themselves,” particularly Disney’s Bob Iger.Now Elon has attempted to turn himself into the victim, a tough role for him. This week, X filed an antitrust lawsuit against the Global Alliance for Responsible Media—an initiative that seeks to reduce the occurrence of ads appearing adjacent to harmful social media content—and the World Federation of Advertisers for allegedly boycotting the platform. In an “open letter” to advertisers that accompanied her bizarre video (as well as the lawsuit), Yaccarino cited a House Judiciary Committee report that found GARM and its members “directly organized boycotts” to “target disfavored platforms,” such as X. In the complaint, which was filed in a Texas federal court, X argued that the “conduct” of the defendants “is a naked restraint of trade without countervailing benefits to competition or consumers” and asked for treble damages. “This is not a decision we took lightly, but it is a direct consequence of their actions,” Yaccarino wrote in her letter. “The illegal behavior of these organizations and their executives cost X billions of dollars.” Yaccarino also managed to find the opportunity to plug her business. “In August 2022, people spent 7.2 billion active minutes on the platform,” she wrote. “Today, that number is more than 9 billion, a 25 percent increase.”Elon then retweeted her “open letter to advertisers,” adding his thought that, “We tried peace for 2 years, now it is war.” As a result of the filing—who wants to get into a legal fight with Elon Musk?—GARM announced that it was winding down its operations. That was probably wise, considering that NPR is reporting that Elon has landed the case before his “favorite judge” in Fort Worth, Reed O’Connor, a Tesla investor and a member of the Federalist Society.

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Bizarro World

A quick recap for all those among us who have lost the plot… One of the world’s richest men blundered into wildly overpaying for a social media platform that has long struggled. After Twitter accepted his offer in April 2022, he tried to back out of the deal but realized he had signed a “no-outs” contract and was going to lose in Delaware court if he didn’t go through with the acquisition. He closed the deal that October, using $24 billion of his own equity, and $7 billion of his friends’ equity—including $1 billion from Larry Ellison—plus another $13 billion from a group of banks that remain stuck with the debt and are unable to sell it in the market for anything close to par. Since he took over, Musk has fired three-quarters of its employees, implemented a litany of bizarre new policies like giving a “verified” blue check mark to anyone who pays for one—no actual identity verification required—and turned it into a toxic dumping ground for all manner of bigotry, while using his own account to push the sort of content that few advertisers would want to be associated with to his 194 million followers. Then he had the unmitigated gall to sue two advertising organizations that no one has ever heard of for following his guidance that they go fuck themselves.I can see why Yaccarino is panicking: Her job is probably on the line. According to an eMarketer report published in the Times, X had advertising revenue of $1.13 billion in 2023, a 52 percent decline from 2022. It hasn’t been much better so far this year. According to the report, X had $114 million in revenue in the second quarter of 2024, a 25 percent decrease from the first quarter of 2024 and 53 percent less than the year-earlier period. Its third-quarter revenue projection is set at $190 million, supposedly bolstered by Olympics-related ad spending (I’m not seeing that in my feed), which would still be 25 percent lower than a year earlier if it were achieved.For a business that was not owned by the world’s richest man to lose 25 percent of its year-over-year revenue would be devastating, especially when he so wildly overpaid for the company in the first place, using a fair amount of leverage. This is a fiasco, for sure, but it’s one of Elon’s and Yaccarino’s own making, not that of the advertisers, who are well within their rights to abandon the platform if they so choose. The equity investors in Elon’s X are wiped out, for sure. Like Elon, who is going to lose his $24 billion, I doubt Larry Ellison will care about losing his $1 billion, as incredible as that may seem. (His net worth is nearly $150 billion these days, up $23 billion so far in 2024.) But I do feel a bit sorry for my old friend Prince Alwaleed bin Talal, of Saudi Arabia. That poor guy, who I once wrote about in an old-school Vanity Fair profile, could have cashed out his holdings in Twitter for $1.9 billion, or at the purchase price of $54.20, in cash, for each of his roughly 35 million shares. Instead, he rolled his equity over into Elon’s X. That money’s gone, dear prince. (I guess he’ll be okay, too; Bloomberg pegs his net worth these days at $15 billion, despite his unplanned stay in the Riyadh Ritz-Carlton in 2017.)

The Banks

The luckiest players in the X deal, at the moment anyway, are Elon’s banks, led by Morgan Stanley and Bank of America, of course, but also Barclays, MUFG, BNP Paribas, Mizuho, and Société Générale, among others. The banks are on the precipice of disaster in this deal. But they are lucky that the company is owned by the world’s richest man, who seems content to keep paying the annual interest of roughly $1.5 billion on the $13 billion of bank debt.Let me assure you, that is not normal behavior. If anyone else owned X, those interest payments would almost certainly cease. There would likely have already been a default, or a restructuring, or a bankruptcy. And the par banks—the banks that made the initial loan—would have sold out long ago to the vulture investing crowd that includes the likes of Marc Rowan at Apollo and Jeffrey Gundlach at DoubleLine. Instead, the par banks are holding on for dear life, hoping that Elon keeps paying that interest and that they somehow recoup their $13 billion.I’m not a lawyer or a judge, and who knows what Elon’s friendly judge in Texas will do with this lawsuit. Maybe it’s moot now that the defendant has closed its doors. But the idea that advertisers can somehow be found liable for choosing not to advertise on a media platform, especially when the owner of said media platform has given them plenty of reasons not to, is laughable.

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