Mon. May 23rd, 2022

Elon Musk’s attempt to buy Twitter for $44bn took a new turn on Friday when the outspoken billionaire said he was putting the deal on hold.

Shares tanked more than 20pc in pre-market trading, with some traders and analysts speculating that Mr Musk was looking for an excuse to pull out of the acquisition.

The Tesla boss initially tweeted: “Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5pc of users.”

Two hours later he insisted he was “still committed to [the] acquisition”. However, at the time of writing the shares were still down nearly 10pc.

Wedbush analyst Dan Ives said: “Many will view this… as a way to get out of this deal in a vastly changing market. The nature of Musk creating so much uncertainty in a tweet (and not a filing) is very troubling to us and [Wall] Street and now sends this whole deal into a circus show.”

Neil Campling from Mirabaud Equity Research took a similar view. He described the tweet as “farcical”, adding: “We’d always said Musk may cut or run or change his tune at the 11th hour and 59 minutes and 59 seconds on the clock. We’re not even close to the 11th hour yet.”

It is possible that Mr Musk’s tweet about pausing the deal was part of an attempt to drive down the buyout price rather than scrapping the deal altogether.

The $54.20 per share offer made by Mr Musk in April was a 38pc premium over the company’s valuation on April 1, based on its closing price that day of $39.31. Since then Twitter’s share price has bounced between highs of $51 and lows of $44: even those dips reflect prices that Twitter’s stock has not reached in the last six months.

The billionaire entrepreneur appears to be financially committed to the buyout despite filings showing he has only raised part of the cash required to complete the deal. Mr Musk has already sold off $8.4bn worth of his Tesla shares to finance the purchase. Another $7.1bn in cash has been pledged by backers including Oracle boss Larry Ellison and cryptocurrency exchange Binance, which has offered $1bn to Mr Musk. A further $6.25bn rides on a margin loan secured against Tesla’s stocks, having been halved from the original $12.5bn sum promised by Morgan Stanley.

All of these publicly-avowed cash commitments fall short of the $44bn required, however, and a lower price may reduce the requirement to find more people and organisations prepared to put up cash.

A significant part of the entrepreneur’s estimated $268bn net wealth is drawn from his 17pc shareholding in Tesla. That company’s price has slumped by a third over the last six weeks as investors wonder whether Twitter will distract Mr Musk from the business of running the electric car maker.

Selling too much of Tesla in one go could prompt a further slide in that company’s price.

Should the deal collapse as a result of Mr Musk’s actions, he faces a $1bn (£818m) termination fee, filings made in April revealed. Analysts said that was a smaller price than an institutional investor in a similar position would pay.

Yet Mr Musk’s upfront explanation for pausing the deal may have some truth to it, despite commentators’ scepticism. While Twitter admits that about 5pc of accounts on the social media site are fake, it warned investors it had applied “significant judgment” to its latest estimate, meaning the true number could be higher. Paying a premium for a company that does not have precise figures on threats to its current model may not be to the Tesla boss’ personal taste.

A pitch deck by Mr Musk, first revealed by the New York Times, revealed his post-buyout plans rely to a large extent on advertising: he wants to increase Twitter’s revenues fivefold, to $26.4bn by 2028, up from $5bn last year. While ads will make up a smaller slice of that 2028 revenue pie, thanks to a target of making $10bn from user subscriptions in six years’ time, that still leaves a multi-billion dollar hill to climb. Advertising is a clear growth target for Twitter under Mr Musk, whether it makes up 90pc of revenues (as it did in 2020) or 45pc, as its proposed buyer recommends.

More fake accounts means less advertising revenue. It could be enough to make even the world’s richest man pause for thought.


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