On April 25 the Twitter board of directors accepted Elon Musk’s take-private transaction at $54.20 per share. The total value being provided in the press is $44 billion in some reports and $43 billion in others. Most just throw that out without using precise language like Enterprise Value or Equity Value. From a quick look at Capital IQ, I see the deal value at $41.3 billion from a Market Cap standpoint and $40.5 billion from an Enterprise Value standpoint. My guess is that the announced value has a more precise fully-diluted share count likely baking in the conversion of convertible notes that convert at $41.50 (some other notes that I believe are outstanding only convert at $80.20 and $105.28 so those would stay in the Net Debt calc).
So please forgive my shortcut here, but rather than going in and doing my own treasury stock method to get fully diluted shares I’m going to just assume the most commonly reported $44 billion number is correct and represents Enterprise Value for purposes of this quick blog post. If it’s marginally wrong because the press is off, then the points I’ll make should still hold true.
Assuming a nice, round $44 billion Enterprise Value values Twitter at roughly 8.7x their $5.08 billion of revenue over the most recent twelve months and 7.4x Wall Street consensus 2022 revenue estimates. It’s also a healthy 30.7x Wall Street consensus 2022 EBITDA estimates. Below is a quick table of comparable public company valuations (per Standard & Poor’s CapitalIQ):
So clearly, Musk and his backers are paying a premium to the comp set on a Median and Mean basis. Some of the comps command better multiples, but those are easily explained when factoring in either growth, diversification, steady margins, or other factors that play into a company’s valuation.
From a valuation standpoint of consensus price targets for Twitter, the price being paid is above the $50 per share consensus twelve-month price target and well above the price target of most banks that updated their estimates after another disappointing 2021 financial performance. For instance, KeyBanc in February lowered their twelve-month price target to $40 per share with a “Bear Case” scenario of $27 per share and a “Bull Case” of $50 per share. So, the $54.20 accepted purchase price is over 35% above their twelve-month price target and even north of their most aggressive case.
Twitter went public back in 2013 at $26 per share (above its $23-$25 filing range) and closed that day (November 7, 2013) at $44.90 per share. The share price has since largely languished. It made a brief appearance over $70 per share, but for the most part it has struggled to look like a good investment for public investors. This despite becoming a clear winner in terms of being in the zeitgeist of our time in terms of attention and influence over public dialogue.
So, for the shareholders who may have bought in at levels over $70 or for convert holders with high conversion prices, the $54.20 accepted purchase price may not be super sexy but given the stock’s track record of poor performance and its outlook, the deal looks great relative to the likely alternative of continued stagnation or worse – potential shareholder lawsuits if the deal had not been accepted. It would not have been challenging to paint a pretty clear picture that the board of directors had not acted in the best interest of shareholders had they turned down this deal.
Companies like Disney, Salesforce, Google, and Facebook had looked at acquiring Twitter in the past, but it was highly improbable that a more attractive competing bid would be coming along any time soon…and I’m certain they looked for one as part of their process. As such, through any reasonable financial / fiduciary duty lens, this looks like the Twitter board of directors made the correct call for shareholders.
On the flip side, it will be very interesting to see if Mr. Musk can make this a good investment. Currently, the multiples he is paying would imply this was more of what we’d traditionally call a “vanity investment”. People will pay multiples that don’t make a ton of sense from the traditional “present value of future cash flows” standpoint to own a sports franchise or an influential newspaper (e.g., Ballmer paying $2 billion for the Clippers or the Bezos deal for WaPo). Time will tell if this is a vanity investment with personal motivations similar to those that led Bezos to buy the Washington Post or if Mr. Musk can actually generate a great return for himself and any backers.
There is certainly room for a great return to happen here. Twitter has historically massively under-earned its potential. It has heretofore lacked great ad monetization despite significant engagement. It hasn’t introduced any meaningful premium and / or subscription services. If Mr. Musk follows through on paying for verification (as a real human and not a bot) then that could add significant high margin revenue and improve user experience. The company’s Average Revenue per Unit (ARPU) has a lot of room for improvement and Mr. Musk assuming control along with being a private company could be the right combination to act on those growth initiatives. I don’t see Twitter being a slam dunk for Musk in terms of high probability ROI on this investment. But there is definitely a path to great returns – better than the Clippers for Ballmer or WaPo for Bezos.
As far as any political or social implications; I’ll leave that discussion for debates on…well…Twitter.