In news released on April 26th, Twitter agreed to a buyout by Elon Musk, subject to a merger agreement. This was publicly released through an 8-K (unscheduled material event) filing to the SEC. A portion of the 8-K form states:
“Under the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Twitter’s common stock (subject to certain exceptions set forth in the Merger Agreement) will be canceled and converted into the right to receive $54.20 in cash, without interest (the ‘Merger Consideration’).”
While many have announced that Elon Musk has bought Twitter, Wall St. remains uncertain the deal will close, with Twitter stock closing at $49.68 as of April 26th. Under traditional stock valuation methods, a confirmed buyout at $54.20 per share would be reflected in a market valuation extremely close to the buyout price. Instead, the current stock price reflects about an 8% difference, reflective of the current risk profile of purchasing the stock. While a successful deal would result in an 8% gain from the current price, a termination would likely result in significant losses since the current valuation is heavily dependent on Twitter’s deal with Elon Musk.
While the merger agreement allows for the potential termination of the deal by either party, a condition in the 8-K filing states that upon a termination of the merger agreement, the terminating party will be responsible for a $1 billion termination fee. This fee lessens the likelihood of termination, but a risk that termination does happen is reflected in the stock price.
The deal is expected to pass all regulatory requirements and antitrust laws as Musk does not own any other media companies, a view confirmed by securities analyst Daniel Ives on his Twitter. Another potential roadblock is securing the funding necessary through a margin loan borrowed against Tesla stock. With such a loan coming closer to fruition, Tesla stock experienced recent losses due to the added uncertainty a loan of this size creates.
Personally, I have a strong conviction that the deal will be successful, with more information likely to surface later this week.
