Written by Toby Clothier, head of global thematic and strategy at Mirabaud Equity Research
There seems to be some confusion about the current state of play with regard to this situation. After an uncharacteristically long silence on Twitter and elsewhere, Elon Musk has come out with US law firm Skadden, Arps, Slate, Meagher & Flom behind him saying he is walking away from the bid for Twitter because he has not had enough data to be comfortable about the percentage of users that are (ro)bots.
Twitter, in turn, has taken on Wachtell, Lipton, Rosen & Katz to argue he must go through with the deal as agreed ($54.20) and that he has not only had all the information he needs, but that he has no legal basis to walk away.
In summary, as far as Musk is concerned, there is no deal, but as far as Twitter is concerned, it is business as usual. The two sides are very far apart at this juncture.
Where do we go from here? The undisturbed price of Twitter was about $39 per share. The stock is now at $34, but it had a profit warning, and it is not impossible that it has another one in the pipeline given the tumult and employee turnover this situation has created – amidst a deteriorating ad-spend backdrop globally, as well as user flight from Twitter.
The Twitter share price could go as low as $25-$30 if the deal is truly off and if it does indeed warn again – as we suspect. Given it is due to report in two weeks, we do not have long to wait. We also have to bear in mind it also now has a top-three shareholder (Musk) who will, presumably, sell his stock in due course if he finds the business so unattractive – which is unhelpful from a technical perspective.
On the other hand, if Twitter’s lawyers prevail in the argument that Musk must deliver on his promise – having signed the Merger Agreement and offered $54.20 per share and been supplied with all the relevant information – then there is potentially a situation where Twitter could double from the high $20s in due course.
This eventuality would also put potentially very significant pressure on Tesla, as this is Musk’s primary/only source of funds, and he has clearly not sold anywhere near enough at this point to fund the portion of the bid that accrues to him. This is, at this stage, not the central/most likely outcome. But equally, it is also not completely impossible, so Tesla holders should keep a close eye on this situation as it develops.
So far, most of the twists and turns have been rather unpredictable, and this pattern will probably continue. The only thing that is certain is that the legal fees on both sides will be quite spectacular. Let the games commence!