The Lex Newsletter: Musk is paying a theoretical 300% premium for Twitter

In a brutal year for technology investors, Twitter has made for an unusual bright spot. On Tuesday, the mercurial Elon Musk delivered his latest surprise. He sent a letter to the social media company declaring his newfound interest in closing a transaction to buy the company at the contractually agreed-upon price of $54.20 per share. Musk, of course, has spent almost three months trying to escape the $44bn deal. A trial over the enforcement of the merger agreement was to begin in Delaware in less than two weeks.

Hedge funds that specialise in so-called merger arbitrage have had a litany of variables to consider when evaluating Twitter shares. The spectacular unpredictability of the world’s richest man is one. Musk can seem to resemble a wealthy middle-aged man intent on buying himself new toys in search of fulfilment — albeit in the form of public companies.

The details on when and how the deal closes remain to be seen. Twitter itself will not simply take Musk’s word for it, given his record. All the same, Twitter shares shot up to $52 on Tuesday. At their nadir in July, just after Musk sought to terminate the deal, Twitter’s stock price slumped to under $33. Anyone buying at that price and hanging around to get $54.20 will see a nominal return of almost 70 per cent or more than 250 per cent, annualised. One such buyer took to Twitter, of all places, to take a bow.

We have closed our long position in Twitter. pic.twitter.com/wsmbhxtyz9

— Hindenburg Research (@HindenburgRes) October 4, 2022

Of course, there is someone on the wrong side of this trade: Musk himself. When he announced the buyout in April, Twitter shareholders were told that they would receive a 38 per cent premium to where the company traded before the Tesla chief executive arrived on the scene.

What does that premium look like today? Twitter rivals Meta and Snap have seen their shares plummet 67 per cent on average in 2022. (Tesla shares, which Musk has been selling to raise cash for his Twitter contribution, are down 30 per cent.)

Applying that collapse to Twitter’s stock price yields a standalone value of $14 per share. A deal at $54.20 then represents a whopping near-300 per cent premium.

Twitter accused Musk of attempting to back out of his deal not because of the company’s alleged misrepresentations about its business but because he developed cold feet from paying too much in the midst of the tech stock rout. These numbers make that argument more powerful.

The hedge fund community largely agrees that Twitter had the better legal case. Only once in history has a buyer been excused by a so-called material adverse effect.

However, such disputes have often led to settlements with lower prices as both buyers and sellers avoid the uncertainty of litigation. LVMH in 2020 tried to cancel its pre-pandemic deal for Tiffany & Co. However, before a scheduled trial, Tiffany accepted a skinny 3 per cent discount and everyone lived happily ever after.

Still, with both Musk and a coterie of Wall Street banks that have to stump up $13bn of debt in a brutal junk debt market, Twitter shareholders will not rest easy until the $54.20 per share is safely wired into their bank accounts. That moment will also leave them the envy of tech shareholders everywhere else.

In other New York news: I recommend two articles I have read recently. Jon Hilsenrath at the Wall Street Journal is one of the leading reporters covering the US Federal Reserve. Read this inspiring story about his father, who escaped the Nazis to live his American dream. Stay for the humorous kicker about how the senior Hilsenrath passes his time at age 92. Second, those watching Industry, the fast-paced television show on junior bankers in the City of London, may have spotted a cameo from an FT journalist. Here he explains how he got to play a bit part in the golden age of TV.

Enjoy the rest of your week,

Sujeet Indap
US Lex editor