The $44 billion purchase of Twitter by Elon Musk appeared to be heading for oblivion. This week, the Tesla CEO and the world’s wealthiest person raised questions about the number fake accounts on the social media platform.
Musk tweeted on Friday that he wanted more information about the number of bots on Twitter and that his plan to buyout of Twitter was “on hold”. Musk spoke Monday at a private conference held in Miami, stating that fake accounts could account for well over 20% of the userbase.
Wall Street analysts view the opening of doubts as a strategy to lower the purchase price of Twitter, at a moment when Tesla’s declining stock price is threatening Musk’s personal wealth.
According to Bloomberg News, Musk stated that Twitter would be acquired at a lower price during the Miami conference.
“Our view is that the $54.20 deal price of Twitter is now out of the Street’s point-of-view and [it] is about either driving lower deal prices or Musk could walk away,” Dan Ives from Wedbush Securities wrote in a research paper.
Musk has been unable to stand the massive pressure on Tesla’s stock following the deal, as well as a changing stock/risk environment over the past month and a variety of other financing factors (equity finance), has led him to ‘cold feet’ on the Twitter deal. Musk and Twitter will likely negotiate a new deal at a lower price if they do.
Angelo Zino is an analyst at CFRA and covers tech companies. He noted that Twitter has maintained a constant estimate of how many bots are on its platform since 2013, when it went public. It was around 5%. Zino suggested that Musk, Twitter’s largest shareholder, could have obtained more information on bot activity without raising it publicly as a possible obstacle to a deal.
Zino said that once he had taken the 9% position, he could have easily picked up the telephone and spoken to any manager to get more information,” Zino stated to CBS MoneyWatch.
Zino said that Zino had put the deal on hold publically because he was looking for a better price.
Musk’s offer of $54.20 per Twitter share represents a 40% premium to the company’s current value. This is before Musk, a billionaire, disclosed that he had taken roughly 9%. Twitter’s stock price has fallen to $38 since the announcement of the deal. Twitter has lost 20% in value since then.
Tesla’s stock has been also affected by the decline in equity markets, which Musk relies on to finance his bid. Tesla shares account for most of Musk’s $224 billion fortune.
A margin loan tied to Tesla’s valuation is part of the financing for the Twitter deal. Media reports claim that Musk has $6.25 billion of debt. However, he is seeking additional equity investors to lower the loan. Fortune estimates that Musk would be able to withstand a drop of Tesla’s stock price up to $420 per share. Below this level, he wouldn’t be able to finance Twitter’s debt financing.
Tesla shares dropped to $724 Monday. According to Bloomberg Billionaires Index, Musk’s fortune has been shaved by a $46 billion drop in stock prices this year.
Zino said that he would not hesitate to negotiate Twitter’s price, even though it could cost Musk a penalty or the $1 million breakup fee stipulated by the purchase agreement.
Zino stated that it was only natural for Zino to make every effort to gain leverage and open up possibilities to revise or walk away from the price.
Ives stated that Twitter will continue to feel the pressure to accept a lower cost because it doesn’t have other options.
He wrote that the “Twitter Board is in a difficult spot with no other waiting at the altar.” Twitter knows that there will be no other financial/strategy bidder to get this deal.
Twitter stock fell after Musk put off the deal, which reflects investor uncertainty. Ives estimated that Musk’s completion probability is below 50%. Zino believes the deal will close. However, he admits that there is no guarantee given Musk’s unpredictable nature.
Zino stated, “When it comes Elon Musk you never really know.”
“I believed that the greatest risk was Elon Musk having a change in heart. I still believe that this is the greatest risk to the deal being done.”
