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Elon Musk just made a best-and-final offer to take Twitter private (NYSE:TWTR) for $54.20 a share, valuing the social media company at $43 billion. “Twitter has extraordinary potential. I will unlock it,” said Musk in a 13-D filing. Is this good news for Twitter shareholders? Yes and no.
Before I dive into the bad news, the good news is that investors could get a chance to take profits on what I believe to be a generous offer. At $54.20 a share, Twitter is valued at 7.2x 2022 sales vs. 9.7x 2022 sales for Snapchat, a company estimated to grow twice as fast as Twitter. If Twitter’s board of directors (set to meet this morning to discuss the offer) says yes to the deal, investors who bought the stock on Musk’s ownership announcement on 4/4 should walk away with a 13% profit.
And here’s the bad news: Musk’s offer may have already put a ceiling on the stock and shares could face significant downside risk if (1) Twitter board ends up saying no or (2) Musk changes his mind. Long story short, the situation has turned into a “full blown Elon circus” per Stifel analyst Mark Kelley, and I think investors who bought into the earlier hype should be extremely concerned. This is because I expect Twitter to reject the deal for a few reasons.
First, while Must’s offer seems generous in my opinion, this may not be attractive enough for Twitter management who has set out an aggressive plan to grow the social media platform into a >$7.5 billion business by 2023. If Twitter can successfully execute its plan, this implies a modest 5.7x 2023 P/S multiple, a figure unlikely to contain the word “premium”.
Second, Musk’s takeover bid appears hostile, as indicated in his statement that he would reconsider his 9.2% stake if his offer is rejected. If Twitter decides to go with Musk, management could face significant pushback from other major shareholders such as Saudi Arabia’s Prince Alwaleed bin Talal, who has openly rejected Musk’s offer on Twitter saying it doesn’t come close to the intrinsic value of the company. By the way, Vanguard Group has recently increased its stake in Twitter to overtake Musk as the largest shareholder with 10.3% of the company.
Third, Musk’s offer could serve as an anchor and open up conversations with other potential acquirers. Already, private equity firm Thoma Bravo is thinking of making a bid for Twitter. Further, Bloomberg just reported that Twitter may adopt a poison pill to allow existing shareholders to buy more shares at a discount. This all points to a lower probability that the Tesla boss will get what he wants.
All told, it’s popcorn time for those on the sidelines as the next few weeks will likely be filled with many twists and turns while shares move based on headlines rather than fundamentals. For Twitter investors, it’s way too early to celebrate, and holding on to the stock simply because of Elon Musk may not be the best investment thesis.
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