Is Twitter Really Worth $46.5 Billion?

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Elon Musk seems to have had cold feet about buying Twitter

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and now makes the excuse that they present false statistics on the number of users, while offering that 20% of their accounts are fake or spam compared to the company’s claim that they are less than 5% , although Musk has no proof of the 20% number.

In fact, that’s probably a guess and comes out of left field as he tweets like “My offer was based on the accuracy of Twitter’s SEC filings.” send a turd emoji to Twitter CEO Parag Agrawal and suggesting the Securities and Exchange Commission (SEC) investigate Twitter.

It could backfire on you, as the SEC filed charges in 2019 against Musk for falsely tweeting, “considering taking Tesla

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private at $420/share. Financing assured. Mr. Musk settled with the SEC, paying $20 million personally and $20 million from Tesla and agreeing to have certain Twitter posts executed by securities attorneys for pre-clearance.

It is also currently under investigation by the SEC for failing to disclose within 10 days that he acquired more than a 5% stake in the company, as required by law. The last thing Mr. Musk should do at this point is try to get more attention from the SEC.

Whether or not Elon Musk tries to walk away from the deal or renegotiate the price, it remains to be seen what Twitter is worth given its lackluster financial performance and the recent market downturn, particularly with tech stocks. And management gave no indication as to whether or not their bullish forecast included a recession, which would have a material negative impact on ad revenue.

It is very likely that there will be a recession in the period 2022-2027 for which the projections that have been made for investment bankers to present their fairness opinion, with some economists worrying that this could be as early as this year.

05/18 Twitter, Inc. has filed its preliminary proxy statement with the SEC related to its acquisition by Elon Musk for $54.20/share, stating some details that have yet to be disclosed, but there is no indication of how Musk arrived at this price.

Twitter hired Goldman Sachs & Co. LLC and JP Morgan Securities LLC, both of which provided written opinions to the Twitter Board on 4/25/22 that the merger was fair. Including stock options and transaction costs, the value of the transaction is estimated at $46.5 billion. The merger agreement ends on October 24, 2022.

The two investment banks struggled to form an opinion due to the lack of direct comparables with Twitter. For its part, Goldman Sachs carried out the following analyzes to establish its fairness opinion

Implicit bonus analysis : This basically looked at the premium paid relative to April 1, 2022 (the last trading day before Elon Musk disclosed ownership on Twitter), April 22, the last trading day before the merger was signed, the 1-year volume-weighted average price, Twitter’s average closing price over a 1-year period ending April 1, 2022, and supply comparison to high and low of the stock over 52 weeks ($71.69 and $32.42, respectively).

The range of numbers is so wide (from -24% from its 52-week high to 1% for its 1-year average to 67% from its 52-week low) that it is unclear how much this analysis is significant.

Illustrative present value of future stock price: This is another analysis by Goldman Sachs that looked at the implied present value of a theoretical future value of Twitter’s equity calculated by a multiple of the coming year’s EBITDA (earnings before interest, taxes, depreciation and amortization).

The tricky part of that is what discount rate you use to discount future years and what multiple of EBITDA to use, which is basically operating income with depreciation and amortizations added back, and all the one-time costs waived. Goldman Sachs used multiples of 15 to 17.5x projected EBITDA for 2023, 2024 and 2025, as reported by management.

He then deducted debt and added back equity investments and cash and cash equivalents. Unleveraged free cash flow from 2022 to 2027 was discounted at 11.4% (derived from the capital asset valuation model), resulting in a per share value between $45.50 and $60.10 $ for Twitter.

Illustrative discounted cash flow

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Analysis :
It was a similar analysis to the previous one. Based on management’s forecast, unleveraged free cash flow (less stock-based compensation) from 2022 to 2027 has been rolled back to its present value as of 12/31/21 using the mid-year and 10-12% discount rates reflecting Capitale’s Twitter cost estimates. To this, a terminal value was calculated using a growth rate to infinity of 5.6% to 9.0%. This resulted in a current value per share of $39.10 to $60.90/share, a fairly wide range.

Analysis of selected previous transactions : Typically, one of the most important analyzes in mergers and acquisitions is to look at comparable deals, and 11 deals have been found in the internet industry since 2010 with an enterprise value of over $1 billion . Unfortunately, many of these comparables are simply too old. Internet M&A has gone through a number of boom and bust cycles, and the only deals in the past two years have been SpotX and Grubhub

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at 33-47x cash flow, respectively. Even Goldman Sachs wrote in the filing that none of the transactions were directly comparable. In any event, this analysis resulted in a per-share value for Twitter of $50.30 to $62.92.

Analysis of premiums paid: This looked at the average premium paid from January 2012 to April 2022 for technology, media and telecommunications companies over $1 billion. This resulted in a premium range of 18% for the 25and percentile, 29% for the median and 44% for the 75and percentile. This resulted in a fair price for Twitter of $46.40 per share to $56.60 per share.

SElected Public Company Comparables: For this analysis, Goldman Sachs looked at Alphabet’s trading multiples

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Inc., Meta Platforms, Inc. Pinterest Inc. and Snap

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Inc. for different periods. Over a 3-year period, Alphabet traded at 13.5x against Meta at 12.8x and Twitter at 25x. Over the past three months, Alphabet traded at 13.3x, Meta at 9x, Pinterest at 17.5x, Snap at 57.3x and Twitter at 20.6x.

Goldman Sachs has also considered multiple public exchanges for Alphabet (10.4x), Meta (6.7x), Pinterest (11.2x), Snap (30.2x) and Twitter which was 11.7x according to management’s most recent estimate and 16, 9x according to Wall Street estimates (IBES). This underscores that there is a big diversion in what Wall Street thinks 2023 will bring for Twitter compared to the much more optimistic outlook of the current management team.

JP Morgan Securities performed similar analyzes and came to similar conclusions. The fact that both investment banks used management projections is not unusual. However, the fact that the projections are so much more optimistic than the Wall Street consensus highlights that there are quite a few risks built into the forecast, which impact valuation.

Management expects 2022 EBITDA of $1.6 billion, growing to $5.4 billion by 2027. Revenue is expected to more than double from $5.9 billion in 2022 to 12.9 billions of dollars over the same period.

In other not-so-good news from Elon Musk, Mr Musk complained on Twitter that S&P gave high marks to Exxon Mobil, one of the biggest producers of fossil fuels, while Tesla was removed from the ESG index (evaluating companies on how they respect environmental, social and governance principles.

Forbes noted that Elon Musk saw $12.4 billion of his fortune disappear on Wednesday, some of which was due to ESG kerfuffle, but some was also due to the general market decline and a statement from the Twitter Board stating that he intended to complete the transaction. and enforce the merger agreement.

If Mr. Musk does not go ahead with the takeover of Twitter, it is extremely likely that he will have to shell out the billion-dollar break-up fee, as claims from miscounted users are nothing new for Twitter. . Twitter’s board also reportedly has the option to sue Elon Musk for damages if he doesn’t go ahead with the merger. Shares on Twitter closed today at $37.75, just 70% of Elon Musk’s bid of $54.20/share.

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