27% Under $54.20, Musk Could Cut New Twitter Deal At $34.20
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Elon Musk — who owns 9.2% of its stock — tweeted that his Twitter

TWTR
take private deal is on hold, according to the Wall Street Journal. In pre-market trade, Twitter stock sits 27% below $54.20 a share — the price at which Musk contracted to buy the social network.

In the past, Musk and take-private deals have had a less than forthright presence on Twitter — for example, in August 2018, he tweeted that he had funding secured for taking Tesla private at $420 a share.

That led Musk and Tesla to pay $40 million in fines and to require him to review some of his tweets with a lawyer before posting them, according to the SEC.

Now Musk is putting last month’s $44 billion deal to take Twitter private on hold. How so? Linking to a May 2 Reuters report about a Twitter securities filing which included its spam count, “Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” noted the Journal, which reported that he later tweeted that he “remains committed to acquisition.”

In its latest quarterly report, Twitter cited sampling of accounts as the basis for its estimate that “spam accounts represented fewer than 5% of its daily active users in the first three months” of 2022. Twitter’s filing also said that “the actual number of false or spam accounts could be higher than we have estimated.”

It looks to me as though this is Musk trying to extricate himself from what he thought was a good way to make the world safer for fake news purveyors. How so? If he could come up with the cash to buy Twitter, I feel confident he would not put the deal on hold for an inaccurate estimate of its spam count.

If he is “still committed to acquisition” that does not mean he is still committed to paying $44 billion to acquire Twitter. So I am wondering whether Musk will pay $1 billion to terminate this deal and try to strike a new one at $34.20 a share.

This raises two questions:

  • Can Musk come up with the $44 billion in cash he needs to complete this deal?
  • Will Musk try to negotiate a new deal at a lower price?

Musk Is Struggling To Come Up With $44 Billion In Cash To Buy Twitter

The financing of Musk’s deal depends on how much money he can borrow against his Tesla stock — which is up 5.6% in pre-market trade. As I wrote last month, before the deal he was on the hook for $150 billion in loans against Tesla shares. So it does not help that Tesla stock has fallen about 30% since April 13 — a day before he announced the deal.

Musk would pay for Twitter through a combination of borrowing money and selling assets. According to the press release of the deal, Musk “has secured $25.5 billion of fully committed debt and margin loan financing and is providing an approximately $21 billion equity commitment” — meaning he would pay for Twitter with with “$13 billion of debt and $33.5 billion of his own money.”

Last month, I argued that this was bad for Tesla shareholders because $12.5 billion of that debt is a margin loan. Were Tesla’s stock to drop by 40%, Musk would have to repay that loan — possibly by selling Tesla shares.

More ominously, this deal increases Musk’s personal borrowing by 70% — from $88 billion to more than $150 billion, according to Reuters. I am wondering whether banks are balking at leveraging Musk’s Tesla holdings that much as they tumble

To limit personal borrowing, he is trying to raise over $6 billion in preferred stock. On May 12, Bloomberg reported that Musk is in talks to raise equity and preferred financing to eliminate the need for a $6.25 billion margin loan tied to his Tesla shares.

With 19 companies — including Binance, the biggest crpyto exchange — having committed roughly $7.1 billion to help him take Twitter private, one analyst still sees tremendous downward pressure on Tesla stock.

As George Geis, law professor at the University of Virginia, told TheStreet.com, if that preferred offering succeeds, it “would still leave a big equity contribution to be made, maybe $20 billion under the current structure, so he would seemingly still need to sell a lot of Tesla stock.”

Will Musk Try To Buy Twitter At a Lower Price?

I can’t predict what Musk and Twitter will do next. However, it looks like Musk will pay $1 billion to cancel the current deal and try to renegotiate a purchase of Twitter at a lower price — perhaps $34.20.

Deal Likely To Be Renegotiated

Will Musk get Twitter at a lower price? Geis said, “I think he’ll try to bring in some money to syndicate his equity commitment, renegotiate a lower deal price, even if it means paying the $1 billion he could come out far ahead, and executing on a new deal. He wants this company,” noted the Street.com.

Another analyst sees that the dynamic between Tesla and Twitter stock is similar to the one driving the stablecoin meltdown. As David Trainer, CEO of the investment firm New Constructs, told TheStreet.com, “Perhaps Twitter is forced to accept a lower price and Musk will need to spend less money, but now, given Tesla’s falling stock, he has less money. This spiral could become a death spiral for the deal” analogous to Terra/LUNA

LUNA
“cryptocurrency meltdown.”

Short Twitter stock, Hindenburg Research, sees a good chance that the deal will close at a lower price which would be less risky to Tesla and Twitter shareholders.

$34.20 Is My Guess For New Deal Price

I am guessing that Musk — with his penchant for weed jokes — would like the $34.20 price. And a case could be made that Musk’s announcement that he would reverse Twitter’s ban on Donald Trump — who was booted off due to the risk of further incitement of violence in the wake of the Jan. 6, 2021 insurrection — will reduce Twitter’s economic value.

That could contribute to a considerable number of Twitter user departures. A recent time2play report concluded that based on 2021 revenues, if Musk takes over Twitter, revenues will drop $828 million as 16.3% of users surveyed exit the platform.

Were Must to let Trump hop back on Twitter, 24% of users would depart according to that survey — which could send revenues down by $2 billion — unless people would pay to see Trump’s tweets or companies would advertise next to them.

Musk reportedly has a much more optimistic view of Twitter — forecasting revenues to quintuple by 2028 to $26.4 billion, according to the New York Times

NYT
.

The current deal looks like it will fall apart. But the last word on this is far from being written or tweeted.

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