Twitter: Recent Developments Favor Blue Bird, Potential 28.6% Upside (NYSE:TWTR)

I’m following up my last Twitter, Inc. (NYSE:TWTR) note because I think there have been interesting developments that could merit an increase to a Twitter long. A Twitter-long position (based on the deal made by Elon Musk for $54.20 per share) seems safer than it has been in a while, with the Zatko (whistleblower) senate hearing now behind us.

In recent “bad” news, Twitter got a decision against it. Twitter did not get access to emails about the merger sent by Musk from his Space X and Tesla (TSLA) email accounts. In recent good news, a motion by Twitter to ask for relief has been made public. This motion was partially denied and partially granted. One thing that was granted was the following (emphasis mine):

Plaintiff also asks Defendants to obtain and produce phone company records concerning the text messages that Musk and Birchall sent or received during the relevant period. This too is reasonable, and it is granted, as it will allow Plaintiff to confirm whether Defendants’ representations that Musk did not text about Twitter during key periods are accurate.

I’m interpreting this from a layman’s (or worse, a speculator’s) perspective. Please keep in mind I don’t have a background in law. Having said that, from a previous hearing, you could already get the impression that team Musk could be trying to cover up or hide the stuff that undermines his case. This isn’t a fact, but a view you could develop. Viewing their actions through such a negative frame became easier after reviewing this recently released motion. Here is an illustrative paragraph (emphasis mine) quoting Twitter lawyers:

Disappearing texts.

Five minutes before the deadline for substantial completion of document production in this litigation on August 29, Defendants finally produced their first tranche of non-email communications-663 messages sent or received by Musk. Two hours later, after the completion deadline, Defendants produced 303 more of Musk’s messages and 302 of Birchall’s. Defendants have certified that this production is substantially complete, yet it contained:

· just four text messages sent or received on May 6, the date on which Musk allegedly realized that Twitter’s disclosures were either “reckless” or “intentionally misleading,” Dkt. 42 ¶¶ 10-11; 1

· zero messages to or from Musk during the four days that followed that purported realization; and

· zero text messages to or from Musk between June 1 to June 7, the days preceding and following Musk’s decision to assert that Twitter had breached the merger agreement. These gaps in the production are notable because they correspond precisely to the period when Musk apparently developed buyer’s remorse and set into action his scheme to escape the merger agreement.

The Court can be confident the production was incomplete because other parties have produced messages to and from Musk during this time period that Musk should have produced.

In the previous hearing, that I mentioned earlier, it was revealed Musk sent a message to a Morgan Stanley Banker (named Grimes, weirdly enough, and emphasis added):

“Let’s slow down just a few days. [Vladimir] Putin’s speech tomorrow is extremely important.”

“It won’t make sense to buy Twitter if we’re heading into world war three,”

World War III is not a “material adverse event,” and it should not matter under the merger agreement.

I understand (could be wrong) that Twitter’s lawyers found this communication only through 3rd party sources. Musk’s side did not include this in the stuff he gave Twitter in discovery, while I believe he should have. The Twitter lawyers then filed for sanctions as Musk had relevant text messages, and at this point, he did come forward with these messages.

My read of these events is that it arguably reveals his real motivation to get out of the Twitter deal: a bad economic backdrop.

But a bad economic situation doesn’t allow him out of the deal. The deal is structured such that Musk is supposed to hold up his end of the bargain even under many adverse circumstances.

As Twitter’s lawyer put it:

Musk’s MO during this whole case-

Terminate first. Figure out a reason later.

One of Twitter’s motions ultimately resulted in Twitter being granted access to phone company records. I’m inclined to believe this increases the odds that Twitter may come up with some more interesting things in discovery as they get their hands on potentially missing texts.

This could hurt Musk’s negotiation position. The worse his position, the less risky a trial (and pushing for $54.20) becomes to Twitter. It may also undermine Musk’s ability to terminate the merger, and it could get Twitter more and more leeway in discovery (if the appearance of Musk’s side is trying to hide or slow down the case rises). That could lead to more discovery being allowed with the option of building Twitter’s case. Even if nothing is found in discovery, it may appear important messages/communications have disappeared. To my understanding, there is legal precedent for these to be assumed to be damaging to Musk in his case.

To be fair, I’m operating on the assumption (which may bias me in my interpretation) that Elon Musk wants to get a discount or out of the deal for economic reasons. My personal suspicion being the whole drama around the number of accounts is not a genuine concern.

In my view, this has now evolved to a situation where the news flow should be to Twitter’s advantage. I think the odds now are much better news comes out that will help Twitter than Musk at this point. It is also still possible the sides settle at a small discount to $54.20.

There is almost 28.6% upside to the deal price. If there’s a settlement, that upside is admittedly a bit less. Meanwhile, the trial is around 30 days away and starts on October 17. It is scheduled to last 5 days. A decision shouldn’t come too long after that.

Obviously, 28% would be a huge return over such a short time period. Admittedly, if Musk somehow gets out from under this deal, Twitter will likely (in the short-term) decline by 50%-60%. At the end of the day, as things stand, I just can’t imagine even a few scenarios where Musk gets out of this deal and walks away. To me, a long Twitter position seems like a high probability of a huge return and a very low probability of an even bigger loss.