On June 6, lawyers for Elon Musk sent a threatening letter to Twitter, Inc. (NYSE: TWTR), which could be seen as a prelude to an attempt to terminate (at no cost) his US$54.20 per-share deal to acquire the social media company because of a “material adverse effect.” Mr. Musk accuses Twitter of “resisting and thwarting” his right to information about the extent of fake or spam bot accounts on the platform.
In its 10-Q filing for the first quarter of 2022, Twitter claimed that such accounts represented less than 5% of its 229 million monetizable daily users during the first quarter. Of course, that claim is not really news: Twitter has been including that estimate in its SEC filings for the last 7+ years. According to Mr. Musk, Twitter has not provided hard data to him. Instead, the company has only offered to provide details about its methods for determining the number of fake accounts. According to Mr. Musk’s attorneys, that is “tantamount to refusing Mr. Musk’s data requests.”
At one point, Mr. Musk said that, to test the veracity of Twitter’s <5% estimate, his team would randomly sample perhaps 100 Twitter followers to test that thesis, although it is unclear how he would actually choose these random accounts. Whether this sampling test has been performed, or what the outcome was, is anyone’s guess.
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In mid-May, Mr. Musk tweeted that he has put the acquisition on hold, claiming he must perform more due diligence on the number of fake accounts. It is unclear what legal theory he is relying upon to make this claim.
Mr. Musk’s cold feet probably stems from a combination of: 1) a stock market environment that is decidedly less friendly than it was in late April when he agreed to the deal; and 2) the price of Tesla stock, by far the main source of his net worth, has plummeted to US$720 from around US$1,000 at the time he negotiated the deal.
A complication for Mr. Musk is that the merger agreement he signed with Twitter specifically waives his right to perform the detailed due diligence that buyers typically perform on merger targets. In addition, the merger contract contains an important legal clause, called “specific performance,” which gives Twitter the right to sue him to compel following through on the agreed-upon terms of the merger.
Given that each side seems to hold fairly powerful levers in the dispute — the threat of a material adverse effect filing by Mr. Musk and a specific performance filing by Twitter — it seems reasonable to assume the parties could negotiate a reduced deal price that would be more palatable to the Tesla CEO. Indeed, at Twitter’s current US$39.88 price, the stock market appears to be forecasting a renegotiated price in the US$42-US$44 range.
Such a price range would seem to be a triumph for Twitter too because if the merger would completely break, the stock could trade at much lower levels, perhaps around US$30, based on the following logic.
Over the twelve months ended March 31, 2022, Twitter’s adjusted EBITDA was about US$1.36 billion. Parenthetically, the US$210 million amount realized in 1Q 2022 was by far the smallest quarterly contribution of any of the last four quarters. In addition, the company’s revenue over the last twelve months totaled about US$5.2 billion, and its free cash flow (defined as operating cash flow minus capital expenditures) over that period is negative US$625 million.
| (in millions of US dollars, except for shares outstanding) | 12 Months Ended March 2022 | 1Q 2022 | 4Q 2021 | 3Q 2021 | 2Q 2021 |
| Monthly Daily Active Users (millions) | 229 | 214.7 | 209.3 | 204 | |
| Revenue | $5,242 | $1,201 | $1,567 | $1,284 | $1,190 |
| Operating Income | $93 | ($128) | $167 | $23 | $30 |
| Operating Cash Flow | $369 | $126 | ($528) | $389 | $382 |
| Capital Expenditures | ($994) | ($163) | ($140) | ($411) | ($279) |
| Adjusted EBITDA (A) | $1,364 | $210 | $489 | $321 | $343 |
| Cash & Short-Term Investments | $6,262 | $6,394 | $7,411 | $8,607 | |
| Debt | $3,065 | $1,988 | $1,893 | $1,923 | |
| Diluted Shares Outstanding (millions) | 838.6 | 865.0 | 798.0 | 869.2 |
Twitter’s enterprise value (EV) is approximately US$27 billion, which means its EV-to-adjusted EBITDA and EV-to-revenue ratios are about 20x and 5.2x, respectively. Both these figures look robust, especially in a market which now hesitates to award high valuations even to rapidly growing companies. For example, Meta Platforms, Inc. (NASDAQ: FB) trades at EV/EBITDA and EV/Revenue ratios of 9.4x and 4.1x, respectively.
Twitter, Inc. last traded at US$39.88 on the NYSE.
Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
