Is Twitter Really Worth $46.5 Billion Dollars?

Elon Musk appears to have gotten cold feet about buying Twitter

, and is now serving up the excuse that they are putting forth false statistics on user numbers, while offering up that 20% of their accounts are fake or spam versus the company’s claim they are under 5% despite Musk having no proof of the 20% number.

In fact, this is likely a guess and comes out of left field as he fires off tweets like “My offer was based on Twitter’s SEC filings being accurate,” sending a turd emoji to Twitter CEO Parag Agrawal and suggesting the Securities and Exchange Commission (SEC) conduct an investigation into Twitter.

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

private at $420/share. Funding secured. Mr. Musk settled with the SEC, paying $20 million personally and $20 million from Tesla and agreeing to run certain Twitter posts by securities lawyers for pre-approval.

He is also currently under investigation by the SEC for failure to disclose within 10 days that he had acquired a 5%+ stake in the company, as required by law. The last thing Mr. Musk should be doing at this juncture is trying to attract more attention from the S.E.C.

Whether or not Elon Musk tries to back out of the deal or renegotiate the price, there is still the question as to what Twitter is worth given it’s tepid financial performance and the recent market downturn, particularly with technology stocks. And management gave no clue as to whether or not their bullish forecast included a recession, which would have a significant negative impact on ad revenue.

It’s very likely that there will be a recession during the 2022-2027 time frame for which the projections which were made for investment bankers to come up with their fairness opinion, with some economists fretting that it could be as early as this year.

On 5/18 Twitter, Inc. filed its preliminary proxy statement with the SEC related to its acquisition by Elon Musk for $54.20/share, laying out some details which were not disclosed yet, but there was no indication as to how Musk arrived at that price.

Twittter hired Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC which both delivered written opinions to the Twitter Board on 4/25/22 that the merger was fair. Including stock options and transaction fees the deal value is estimated to be $46.5 billion. The merger agreement terminates on October 24, 2022.

The two investment banks had a difficult job coming up with an opinion due to the lack of direct comparables to Twitter. For its part, Goldman Sachs conducted the following analyses in coming up with its fairness opinion

Implied Premia Analysis : This basically looked at the premium paid compared to April 1, 2022 (the last trading day before Elon Musk disclosed ownership in Twitter), April 22, the last trading day before the signing of the merger, the volume weighted average price over a 1-year period, the average closing price of Twitter over a 1-year period ending April 1, 2022 as well as comparing the bid to the stock’s 52-week high and low ($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’s not clear how meaningful this analysis is.

Illustrative Present Value of Future Share Price : This was another analysis performed whereby Goldman Sachs which looked at the implied present value of an a theoretical future value of Twitter’s equity calculated by a multiple of year ahead EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

The tricky part of this is what discount rate you use to discount the forward years into present value, and what multiple of EBITDA to use, which is basically operating income with depreciation and amortization added back, and any one-time costs backed out. Goldman Sachs used multiples of 15-17.5x projected EBITDA for 2023, 2024 and 2025, as presented by management.

It then deducted debt and added back equity investments and cash and cash equivalents. Unlevered free cash flow from 2022-2027 was discounted back at 11.4% (derived from the Capital Asset Pricing Model) and this resulted in a value per share between $45.50 and $60.10 for Twitter.

Illustrative Discounted Cash Flow

Analysis :
This was a similar analysis to the prior one. Using management forecasts, Unlevered Free Cash Flow (less stock based compensation) from 2022-2027 was discounted back to present value at 12/31/21 using the mid-year convention and discount rates of 10-12% reflecting estimates of Twitter’s cost of capital. To this, a terminal value was calculated using a perpetual growth rate of 5.6% to 9.0%. This resulted in a present value per share of $39.10 to $60.90/share, quite a large range.

Selected Precedent Transactions Analysis : Typically one of the most important analyses in M&A is to look at comparable transactions, and 11 transactions were found in the Internet industry since 2010 with an enterprise value of more than $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 transactions in the last two years were SpotX and Grubhub

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 value per share for Twitter of $50.30-$62.92.

Premia Paid Analysis : This looked at the average premium paid from January 2012 to April 2022 for technology, media and telecom companies over $1 billion. This resulted in a range of an 18% premium for the 25th percentile, 29% for the median and 44% for the 75th 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 the trading multiples of Alphabet

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

Inc. for various time frames. Over a 3 year period, Alphabet traded at 13.5x versus Meta at 12.8x and 25x for Twitter. For the last 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 also looked at public trading multiples for Alphabet (10.4x), Meta (6.7x), Pinterest (11.2x), Snap (30.2x) and Twitter which was 11.7x based on management’s most recent estimate and 16.9x based on Wall Street estimates (IBES). This emphasizes that there is a wide diversion in what Wall Street thinks 2023 will bring for Twitter versus a much more optimistic outlook from the current management team.

J. P. Morgan Securities did similar analyses 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 Wall Street Consensus emphasize that there is quite a bit of risk embedded in the forecasts, which impact what the valuation.

Management is forecasting $1.6 billion in EBITDA for 2022, rising to $5.4 billion by 2027. Revenue is forecasted to more than double from $5.9 billion in 2022 to $12.9 billion during the same time frame.

In other not so great Elon Musk news, Mr. Musk complained on Twitter that S&P gave high marks to Exxon Mobil, one of the largest producers of fossil fuels, while Tesla was dropped from the E.S.G. index (gauging companies on how they follow 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 the E.S.G. kerfuffle but some of it was also due to the broad market decline and a statement by the Twitter Board that it intends to close the transaction and enforce the merger agreement.

If Mr. Musk fails to go forward with the buyout of Twitter it’s extremely likely that he will have to cough up the $1 billion break-up fee as the claims of miscounted users are nothing new to Twitter. The Board of Twitter also would have the option to sue Elon Musk for damages if he does not go forward with the merger. Shares in Twitter closed today at $37.75, just 70% of Elon Musk’s offer of $54.20/share.

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