Happy Sunday, and welcome back to Dry Powder.

What possible reason could the world’s richest man have for stiffing his creditors, putting Twitter at risk of involuntary bankruptcy proceedings? In today’s issue, a look at Elon’s latest self-induced headache, fresh reporting on the bidders lining up for Simon & Schuster, and a nod to Michael Jordan, who made a killing offloading the Charlotte Hornets.

As a former restructuring and bankruptcy advisor at Lazard, I can recognize the signs of a company in distress. After all, it’s a pretty obvious tell that there’s financial trouble brewing when a company stops paying its bills as they become due. That’s a recipe for financial disaster, or bankruptcy, or both. Last time I checked, if a company has more than 12 creditors—as Twitter does—then any three of them can join together to put a company into an involuntary bankruptcy proceeding. And Elon is in danger here. At some point, the creditors he is mindlessly stiffing on a regular basis are going to get sufficiently pissed to throw Twitter into bankruptcy.

This is a real head-scratcher. Obviously Elon can afford to pay Twitter’s bills: it’s couch cushion money for him. So he must have a reason for not doing so, which of course he’s not sharing. (If I ask for a comment, I’ll just get the poop emoji in return.) Is he taking a page out of Donald Trump’s playbook? Trump, of course, was notorious for stiffing his creditors, his contractors, and his tradesmen and then mostly getting away with it. (Some five companies he owned did go through bankruptcy but none of those proceedings seemed to affect him very much.)

Generally speaking, Trump was able to not pay creditors what he owed them, in part because they must have decided that life was too short to get into a legal fight with him. (Of course, now Trump is in legal fights with governments, which have more resources and patience than he does.) Is Elon doing something similar? He can probably get away with not paying his landlord in Boulder, or JAMS, or Joele Frank, but I assume that Google, or its parent, Alphabet, with a market value of $1.5 trillion, will be more than happy to litigate with Elon to get him to pay the Google Cloud bill.

What’s as clear today as it was on October 27, when the $44 billion changed hands and Elon took control of Twitter, is that the $31 billion of equity that Elon ($24 billion) and his friends ($7 billion) put into the leveraged buyout of Twitter is gone. It’s a zero. In fact, the Twitter buyout may be one of the very worst acquisitions in the history of Wall Street, with something like $37 billion in value flushed—the $31 billion of equity and about half of the value of the $13 billion of debt, or another $6 billion—pretty much as soon as the deal closed.

Unfortunately for Elon, and his fellow equity holders and the banks still holding on to the $13 billion of debt (which should have been syndicated long ago), he has done nothing in the eight months since he’s owned Twitter to create value for his partners; in fact, just the opposite. He’s destroyed value for the equity and made it virtually impossible for the big Wall Street banks that still own the $13 billion of senior debt to sell it to other investors, unless they are willing to take a huge writedown—on the order of 50 percent—to move the debt off their balance sheets. At some point, the Federal Reserve, the banks’ prudential regulator, is going to force them to sell the debt, perfect their losses, or to take a serious impairment charge against the debt and perfect that loss.

At least one of Elon’s Twitter investors, Fidelity, is slowly but surely facing up to the reality of its investment in Twitter. In late May, for the third time since the Twitter deal closed, one Fidelity fund has publicly marked down the value of its investment in Twitter. It now carries the small Twitter investment that is housed in that fund at $6.55 million, down 67 percent from the $20 million, or so, that the one fund valued Twitter at the end of October 2022. By that same logic, Fidelity’s overall $316 million equity investment in Twitter is now worth around $104 million. Of course, it’s really worth zero, but Fidelity, at least, is willing to acknowledge that two-thirds of its investment is gone. Soon enough, all the equity investors in Twitter will acknowledge a similar reality.

So what is Elon’s game here? Perhaps, as I have written before, he is essentially cosplaying as a bankrupt entity—by not paying his bills as they become due—so that he can scare the big Wall Street banks that own Twitter’s $13 billion of debt to sell it to him at a steep discount, perhaps at a price even lower than the 50 cents on the dollar it would probably trade for now, if marketed to investors. Not that Elon necessarily wants to buy the debt, even at a big discount. But this may be the path of least resistance if he wants to prevent the company from falling into the hands of the voracious distressed debt community on Wall Street who are in the “loan-to-own” business.

Once that bank debt starts to trade, the Twitter fireworks will really begin. If Elon buys the debt, then he can keep control of Twitter for whatever perverse reasons he has for still wanting to own this pig. If the debt gets bought by the likes of DoubleLine Capital, or Apollo, or Oaktree Capital, then all bets are off for Elon and he will lose control of Twitter.

As the Wall Street Journal reported earlier this week, its sister company, HarperCollins, is one of the five or so bidders in the second round, along with KKR, the large alternative asset manager. The rest of the field, I’m told, is also composed of financial buyers, some such as Veritas Capital, which bought Houghton Mifflin Harcourt, in April 2022, for around $2.8 billion, or perhaps Blackstone, which has made owning “high-quality content” one of its “highest-conviction investment themes,” according to Joe Baratta, the firm’s head of private equity. (Blackstone has backed ex-Disney executives Kevin Mayer and Tom Staggs in buying content companies—S&S would certainly fit the bill.) In any event, there is a big opportunity for a private equity firm to combine S&S with its other media and publishing assets as a way to cut costs and increase profitability.

While Paramount was misguided in thinking that a combination of S&S and Penguin Random House would ever fly from an antitrust point of view, I suspect the Paramount executives will not make the same mistake again. That rules out HarperCollins as a buyer. Sorry Rupert. But there is absolutely no way that Paramount will risk another battle with the Justice Department and try to sell S&S to a major publishing competitor, even if it is smaller than Penguin Random House, which is by far the largest of the lot. HarperCollins, the number two book publisher, can serve as a fine stalking horse for the other bidders, proving useful for Aryeh in that regard, but there’s no way in hell that Murdoch will end up with S&S. That means S&S will more than likely end up in the hands of a financial buyer.

The pole position here, I suspect, belongs to KKR, which has a long history of investing in the media and publishing businesses and owns stakes in Skydance Media, Epic Games, Axel Springer, and Ari Emanuel’s Endeavor. Once upon a time, KKR spent 22 years struggling with Primedia, the owner of a bunch of magazines, including Seventeen and New York, among other publishing assets, before selling the company to TPG, in 2011. (Disclosure: TPG is an investor in Puck, but you all know that already.)

The good news for Paramount, and Aryeh, is that S&S has two tailwinds at the moment that should lead to a successful transaction. First, the M&A market has had a moribund 2023 so far, making a legendary company, such as S&S, an attractive acquisition target, especially for a financial buyer with plenty of dry powder to put to work. These guys have got to do deals and there have been few opportunities so far this year.

Being owned by KKR, or its ilk, could also work out very well for Karp and his management team, at least financially. He probably doesn’t own any Paramount Global stock as C.E.O. of S&S. Under, say, KKR’s ownership, Karp will get plenty of private S&S stock in order to give him every incentive he needs to keep up the good work so that when the company is sold, or taken public, a few years later, Karp can cash in. That could prove to be very financially lucrative for Karp and his management brethren. He probably wouldn’t get anything like that deal from HarperCollins and might even be a victim of the combination. I suspect Karp is rooting for a financial buyer to take S&S, even though he probably will have little say in the end who Paramount chooses to buy the company.

When you put it all together—the consistent earnings that Karp has produced for Paramount in the last few years, plus the $200 million that Paramount got from PRH after the first deal cratered, plus the at least $2 billion that KKR, or whoever wins S&S will have to pay—Paramount’s longtime ownership of S&S clearly has paid off. Combine the S&S windfall with what Paramount hopes to receive from selling a majority stake in BET Media Group—perhaps another $2 billion or so—and Paramount is putting together a nice little cash horde that it’s going to need to continue to fight the brutal streaming wars.

After all, it’s been a tough year for Paramount. In the past year, the stock is down by one-third—the company is now worth about $11 billion—and its largest economic shareholder, Warren Buffet, has gone on the record saying he doesn’t understand the economics of the streaming business and that he doesn’t think it can be profitable unless the monthly price consumers are willing to pay for it is increased dramatically. Paramount needs all the help it can get at this point. And it sounds like Karp and S&S will be doing their part.

The price that Plotkin and Schnall are paying for the Hornets will make it the third highest price paid for an NBA team, after the $4 billion paid by Mat Ishbia for the Phoenix Suns last year and the $3.3 billion that Joe Tsai paid for the Brooklyn Nets in 2019. While the prices for many professional sports teams continue to spiral upwards, it’s the purchase price of NFL teams that continue to lead the market higher and higher. Less than a year after Rob Walton, with a net worth of some $65 billion, agreed to pay a record $4.65 billion for the Denver Broncos, along comes financial entrepreneurs Josh Harris, David Blitzer, and Mitchell Rales, and their consortium of partners, who agreed to pay $6 billion for the Washington Commanders, setting a new record for the NFL.

It’s anyone’s guess where this all ends. Professional sports teams are like waterfront property. They aren’t making any more of them, or very few of them anyway. The teams are worth more each year because live sports are one of the few things that people will still tune into on their television sets or computer screens. That makes the teams, which auction their media rights deals, very valuable. But I think there is a point beyond which the networks and the streamers can go. And it’s fast approaching. Except for Netflix, the streamers are losing money. Linear TV is declining rapidly, making it increasingly difficult for, say, Disney’s ESPN to pay up for broadcasting and streaming rights for live sports events. Something has to give, and soon. That’s why Jordan, I suspect, is getting out while the getting is good.