SpaceX’s xAI merger keeps legal liability and debt at arm’s length: report

SpaceX’s acquisition of xAI was structured to shield the rocket maker from xAI’s legal liabilities while eliminating any obligation to repay the AI startup’s billions in debt, as per people reportedly familiar with the transaction.

The update was initially reported by Reuters.

SpaceX merger structure

SpaceX completed its acquisition of xAI using a merger structure designed to keep the AI firm’s debt and legal exposure separate from SpaceX, Reuters noted, citing people reportedly familiar with the deal.

Rather than fully combining the two companies, SpaceX retained xAI as a wholly owned subsidiary. The structure, commonly referred to as a triangular merger, allows xAI’s liabilities, contracts, and outstanding debt to remain isolated from SpaceX’s balance sheet.

As a result, SpaceX is not required to repay xAI’s existing debt, which includes at least $12 billion inherited from X and several billion dollars more raised since then. The structure also prevents the transaction from triggering a change-of-control clause that could have forced immediate repayment to bondholders.

“In an acquisition where the target ends up as a subsidiary of the buyer, no prior liabilities of the target necessarily become liabilities of the parent,” Gary Simon, a corporate attorney at Hughes Hubbard & Reed, stated.

Debt obligations avoided

The SpaceX xAI merger was also structured to ensure it did not qualify as a change of control under xAI’s debt agreements. Matt Woodruff, senior analyst at CreditSights, noted that even if SpaceX might have qualified as a “permitted holder,” the merger’s structure removes any ambiguity.

“The permitted holder definition includes the principal investor and its affiliates, which of course is Musk. That would presumably mean SpaceX is treated as an affiliate, so a change of control is not required,” Woodruff stated. “There’s really no realistic possibility that this would trigger a default given the way it is structured.”

Despite the scale of the transaction, which values xAI at $250 billion and SpaceX at $1 trillion, the deal is not expected to delay SpaceX’s planned initial public offering (IPO) later this year.

SpaceX has not issued a comment about the matter as of writing.

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