Twitter – The price of free speech pt. VI

Musk and the board swap places.

• Mr Musk is seeking to kill his deal to acquire Twitter after realising that Twitter is greatly overvalued at $54.20 per share which is what anyone with a brain and a spreadsheet could have (and in a few cases did) told him long before the deal was even announced.
• This was uncharacteristically announced in an SEC filing rather than his normal habit of market communication via tweet.
• His gripe remains largely unchanged which is that Twitter failed to provide adequate information regarding the number of fake and spam accounts which among other things makes up his case for ditching the deal.
• I think that the reality is very different.
• Riding a wave of popularity driven by his stance on free speech led him to make an offer for the company that was emotionally and ideologically motivated rather than being based on fundamentals.
• His market timing could not have been worse as just as he made the offer, the valuation of technology shares cratered leaving Twitter’s valuation as the outlier supported by his bid.
• Even in mid-April, I thought that the deal grossly overvalued Twitter (see here) and with the crash in technology valuations, this has been greatly exacerbated.
• Faced with an acquisition which could be as much as 3x overvalued (see below), I suspect that Mr Musk’s team have had difficulty in rustling up interest from capital providers.
• This combined with a cooling of his ardour is what I think likes behind the fake account fuss, which is being driven by a desire to renegotiate at a much lower price.
• This puts the deal at great risk, and I suspect that Mr Musk’s efforts to wriggle out of the deal will prove ineffective meaning that he either has to go through with it or pay Twitter $1bn.
• Twitter’s board has also done a U-turn on the acquisition from trying to block it with a poison pill (see here) to going to court to enforce the transaction.
• The board is entirely correct in going to court as this deal represents a far better deal for its shareholders than anything anyone else is going to offer or anything that the market is going to ascribe to the company for the foreseeable future.
• Growth stocks and especially those that don’t make any money are deeply out of favour and Twitter has not made any real money on a sustainable basis for almost all of its history.
• Revenues in 2021 were $5bn meaning that 2022 revenues might be in the range of $6bn.
• At Mr Musk’s offer price, the company is valued at 7.2x 2022 EV / sales, which, in this environment, is much too high.
• There are several examples in the market where the EV / sales multiple has been compressed to 2.0x or less and it is at this point that I begin to get comfortable that fundamentals are fully back in control.
• This would mean that the right valuation of Twitter is somewhere around $13bn – $15bn compared to the $29bn that the market is currently ascribing to the company.
• Consequently, even if the deal fails and Musk pays $1bn, there could easily be another 50% of downside before Twitter hits a bottom.
• For those who decided to hold on at $48.45 (see here), $35 still represents a fantastic deal for shareholders which I would grab with both hands if owned any shares (which I don’t) and had failed to sell them at $48.45.