Elon Musk attends The 2022 Met Gala Celebrating “In America: An Anthology of Fashion” at The Metropolitan Museum of Art on May 02, 2022 in New York City.
- A startup called Writer, Inc., sued Twitter this week over non-payment.
- The new complaint marks the sixth U.S. company to sue for non-payment of bills since Elon Musk took over the social media business last October.
- Vendor non-payment disputes are not typical after a buyout, finance experts told CNBC. They are more typical of a financially distressed company.
Elon Musk's Twitter was sued again in California this week for alleged failure to pay a vendor.
The latest complaint comes from a tech startup called Writer, Inc., and it's at least the sixth company to sue Twitter in the United States over breach of contract and non-payment since Musk took over about 4 months ago.
The Tesla and SpaceX CEO led a $44 billion buyout of Twitter, which closed around October 27, 2022. He sold billions of dollars worth of his Tesla shares and took on some $13 billion in debt at Twitter as he became the sole director, new owner and CEO there.
Since then, Musk's social media venture has been sued for non-payment by Writer and at least five others:
- Its landlord in San Francisco, Columbia REIT
- A private jet transportation service provider, Private Jet Services Group
- An events-planning and production company, Blueprint Studios Trends
- An M&A consulting firm, Innisfree M&A
- And Analysis Group, a company that provided litigation related consulting services to Twitter and its counsel before Musk bought the company.
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A legal and public records database, PlainSite, is tracking these lawsuits as they arise.
Money Report
Twitter's alleged non-payment of rent to Columbia REIT, has led to the real estate company defaulting on loans for buildings, including where Musk leases office space at 650 California Street in San Francisco, Fortune first reported.
Twitter has also allegedly fallen behind on payments to larger companies. According to a Platformer report on Thursday, Twitter suddenly cut off 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 newest complaint, filed in California Superior Court in San Francisco, Writer says that Twitter failed to pay a bill for the relatively humble amount of $113,856.
Previously known as Qordoba, Writer describes itself as an AI company that helps employees create content that meets their employer's standards for brand, copy, and other style guidelines.
Writer did not immediately respond to a request for a comment on the matter.
Twitter's Vice President of Product, Trust & Safety, Ella Irwin, told CNBC via e-mail, "We do not comment on pending litigation or various speculation surrounding Twitter's financial health."
Musk has publicly groused about and made light of Twitter's financial woes. This week, he wrote on Twitter, "Say what you want about me, but I acquired the world's largest non-profit for $44B lol."
Red flags
Nonpayment disputes like these are not 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 within a very short window of filing for bankruptcy."
Vanderbilt University finance professor Josh T. White, a former SEC economist, agreed the moves are unusual, and said litigation over nonpayment to vendors could result from "incorrect and aggressive capital structure."
Musk's Twitter deal was financed with around 30% debt and 70% equity at closing.
White explained that the high debt level is aggressive for a company with volatile and sometimes even negative free cash flow, such as Twitter had experienced in the past three years.
Leveraged buyouts more often target companies with stable cash flows that can be used to service debt and generate a tax shield by deducting interest expense, he wrote.
"Using more debt and less equity reduces the amount of liquid cash Musk and his equity co-investors had to contribute at closing, which can potentially generate a higher internal rate of return if the company turns out to be profitable," White said.
Meanwhile, even after aggressive cost-cutting measures, including widespread layoffs and cutbacks on perks and infrastructure, Twitter is still probably struggling to generate positive free cash flow to pay its obligations, White suggested. "Nonpayment, and contract violations are certainly a red flag that the company is likely financially distressed."
