Barbarian(s) at the Gate
Elon Musk just put Twitter in play
Barbarians at the Gate: The Fall of RJR Nabisco is a 1989 book about the leveraged buyout of RJR Nabisco, written by investigative journalists Bryan Burrough and John Helyar. It tells the story of the bidding war between F. Ross Johnson, the CEO of RJR Nabisco who planned to buy out the rest of the Nabisco shareholders, and Henry Kravis, of KKR fame. It is an exciting business story, that directly dives into the 1980s Wall Street greed and LBO boom.
Elon Musk’s attempt to take Twitter private through a hostile takeover bid has to be one of the most exciting business stories of recent history, and takes us back to the corporate raiders era featured in Barbarians at the Gate. Here is a quick summary of events so far:
Since the end of January, Elon Musk has been accumulating 73 million shares in Twitter, or 9.2% of capital.
This stake was revealed on April 4 through a (late) 13G filing.
This filing was amended the next day by a 13D filing, which revealed that: (1) Twitter was to appoint Musk to its Board of Directors and (2) that for so long as Musk was serving on the Board and 90 days thereafter, he would not become the beneficial owner of more than 14.9% of Twitter.
On April 11, Twitter announced that Elon Musk would not be joining Twitter’s board.
On April 14, Musk wrote to Bret Taylor (Twitter’s Chairman of the Board) to offer to buy 100% of the company at $54.20 per share, a 38% premium above the price on the last trading day before Musk’s stake was revealed. He announced that this was his best and final offer, and, if not accepted, would reconsider his position as a shareholder.
On April 15, Twitter adopted a shareholder rights plan (the so-called poison pill), that would be triggered if an entity, person or group acquires beneficial ownership of 15% or more of Twitter’s outstanding common stock in a transaction not approved by the Board.
The Twitter End Game
If we know one thing about Elon Musk, it’s that he is rather unpredictable. While Musk insisted he has the money for the deal, his offer did not include a financing plan and it remains to be seen how his bid could be financed. That being said, Musk is determined and doesn’t give up easily, and it’s clear he loves Twitter. The social network has been a wonderful marketing tool for his various ventures and for himself.
The poison pill that the Board put in place, contrary to many comments I have recently seen, does not mean that the Board is rejecting his offer. It’s a defense mechanism for companies facing a hostile bid, and is generally positive under such circumstances as it gives the Board more time to figure out what’s best for shareholders. It gives them more time to assess the offer. It gives them a stronger hand to negotiate with Musk. It facilitates the emergence of other bidders.
Following the adoption by the Twitter Board of Director of the shareholder rights plan, Musk hinted (in his usual cryptic way) that he may be considering launching a tender offer:
Given this set of circumstances, what are your options as Twitter’s Board of Directors? After all, Musk’s bid does not look that serious given its 420 reference and the fact that it does not include a financing plan.
It’s hard to imagine them simply rejecting Musk’s offer without assessing alternative bids:
While you might argue that Musk’s bid is not really serious, every investment bank is probably pitching it to potential buyers right now. Every potential buyers must be looking at this asset. How do you explain to your long-suffering shareholders that you are against any offer after years of mismanagement? How do you make the case that Twitter is worth much more than currently implied by the market?
Besides, Musk is the richest guy in the world. If he really wants a new toy, why wouldn’t he just accept to trigger your poison pill and keep building his stake? What’s a couple billion dollars to him? He does not have to go after Twitter alone and could partner with other billionaires or Private Equity. He could run a proxy fight. This potentially puts you under a lot of pressure in the future, and you might not get away from the “Musk overhang”. Not to mention other activists might get involved, siding with Musk.
With that in mind, what are your alternatives if you are not willing to take Musk’s initial offer?
You might negotiate a better price with him, and end up letting him buy 100% of the asset (although I’m sure the Board would prefer another buyer by a wide margin).
You might agree to let him tender 50% of the shares: he gets control, Twitter remains public, and shareholders supporting Musk’s offer get a way out.
You find another buyer that can at least match Musk’s offer while giving you some guarantees to let you run the business the way you want (probably after a few cost cuts), making both shareholders and employees happy, with minimal disruption. Musk gets to sell his shares at a nice profit. Everyone wins.
With an influential barbarian at their gate and the prospect of a hostile takeover or potential proxy battle, Twitter has to be in play. There must be a long list of prospective buyers, and the Twitter Board would surely be happy to hear from them. Which leads us to our next question.
Who could buy Twitter?
While Twitter’s financial performance left a lot to desire for a long time, it is arguably one of the most important and strategic media assets. Recent events, such as Covid or the war between Russia and Ukraine, only highlighted the importance of the platform. I’m sure many companies or billionaires would love to own Twitter.
Here are a couple that might be interested and would make sense:
Obviously, the Big Tech names (Alphabet, Facebook, Apple, Microsoft), although most of them could have issues with antitrust (mainly Alphabet and Facebook), or not want the headaches associated with running a social media platform (Apple). That leaves Microsoft, but they are already spending a significant amount on Activision this year.
Other tech companies: PayPal (which was rumored to explore a purchase of Pinterest), Netflix, Spotify, … It’s harder for me to see the synergies here, but they could still be candidates.
Salesforce and Disney, which were both interested in 2016.
Private Equity (Thoma Bravo is a rumored suitor, but likely just for part of the financing given the size of the deal).
A consortium of billionaires, maybe partnering with PE? If you are Bezos, why not buy this to troll Musk back and complement the Washington Post?
While none of them look perfect, there are many potential suitors - and all of them would probably look more attractive than Musk to the Board and to the regulator.
What Is Twitter Worth?
At $54.20, Elon Musk’s offer values Twitter at 6.8x EV/Sales and 28.1x EV/EBITDA based on next year’s estimates. It definitely looks faire relative to where other social media platforms such as Facebook and Pinterest trade at.
It’s also fair relative to where Twitter was expected to be sold in 2016, when Disney, Salesforce, and Google’s parent Alphabet considered bidding for the company. At the time, analysts were expecting a sale price in the $17-$26 range (13x to 21x EBITDA):
Our EV/EBITDA analysis suggests a valuation range of $17-$26 for TWTR as most reasonable. We examine various comps and precedents, yielding a range of $9 (using YHOO’s takeout valuation) to $29 (applying LNKD’s 24x EBITDA takeout multiple), but we think the most reasonable comps are GOOGL (13x) and FB (21x), implying a range of $17-$26. We also look at what TWTR’s growth profile should imply (what should a company forecast to grow EBITDA 21% y/y in 2017 be worth?) and we believe ~14x is appropriate (all else equal), suggesting $19. We acknowledge the bull argument that TWTR should get a LNKD multiple of 24x forward EBITDA, but that seems aggressive given TWTR’s suspect growth rate, challenged market positioning, and inferior monetization model (LNKD’s recurring SaaS subscription vs. TWTR’s seasonal and volatile ad model).
I would argue that Twitter is in a much stronger position today than in 2016 and hence deserves a higher valuation. Donald Trump has since pushed it to the forefront of global news. Everyone knows it has been mismanaged: there are plenty of monetization opportunities, and the company has a bloated cost structure where a lot of efficiencies could be found (Twitter spends $3.0 billion on SG&A and R&D combined, while companies like Pinterest and Etsy respectively only spend $1.7 and $1.2 billion).
Could a strategic or financial acquirer cut costs by $500 million? Probably. At $54.20, that would drop the EBITDA multiple from 28x to 21x. Could costs be cut by $1.0 billion? Maybe. Then the EBITDA multiple would drop to below 17x.
All in all, while $54.20 is a fair price on paper, it does not take into account future operational efficiencies. A bidding war is therefore a possibility, and in full Elon’s fashion I am pegging the highest offer at $69, which would translate into a high 35.9x NTM EV/EBITDA multiple, and suddenly becomes a much more reasonable 21.2x EBITDA after $1.0 billion cost cuts.
Conclusion
Following Musk’s offer, Twitter is likely in play. Several potential buyers should emerge for this strategic asset, and I find it highly unlikely that none of them will be ready to at least match Elon’s offer while offering better terms and guarantees.
If Twitter is bought at Musk’s offer price ($54.20), shares have 20% upside from Thursday’s closing price of $45.08. If a bidding war emerges, I believe the final take-out price could offer up to around 50% upside to current prices.
If no other buyer emerges and Musk’s offer falls apart, he could sell his shares. Twitter would likely trade back down to the $33-$39 range where it sat before we learnt of Musk’s stake (which, at 17x-21x EBITDA or 4x-5x sales, is a relatively fair price for an asset that surely will need to double down on its monetization efforts). At the midpoint of this range, that’s 20% downside from $45.08.
The market seems to imply a 50% chance that Twitter gets bought at $54.20. While it may be right not to give too much credit to Musk’s offer, it’s hard to imagine that no other credible offer will emerge for this asset - and potentially at a higher price.