(Bloomberg) -- There’s no edit button on Twitter. But Elon Musk may be trying to put one on his $44 billion takeover bid, which means there’s not likely to be much upside for shareholders any time soon.
Musk on Monday roiled the social media service’s stock yet again, saying he could lower his $54.20-a-share offer. He followed that Tuesday by saying the deal will go ahead only if Twitter Inc (NYSE:TWTR). can prove that fewer than 5% its users are bots. Twitter said it’s committed to closing the deal on the original terms.
The stock now sits 31% below the price Musk has contractually agreed to pay, closing at its lowest level since March 17. For shareholders, it’s been chaos since Musk disclosed a 9% stake in the company last month, which he followed with an April 14 buyout offer.
Musk’s proposal, which Twitter’s board accepted April 25, initially looked like a golden ticket for investors, since it landed amid a renewed slide in technology stocks that pushed the Nasdaq 100 Index into a bear market. But now confusion reigns. If Musk tries to cut the price, what will Twitter’s board do? Will the deal fall apart?
“It’s hard to calibrate the deal risk given the lack of precedents on so many levels of this deal, right down to turning around a few weeks after the ink is dry,” said Cabot (NYSE:CBT) Henderson, who has a focus on merger arbitrage and special situations as market strategist at JonesTrading. “Since we are in uncharted territory and given Musk’s mercurial nature, investors should expect anything can and will happen.”
Here’s a look at some of the most likely scenarios to come out of this deal and what they could mean for Twitter’s shareholders:
1. Musk Offers a Lower Price
Musk stoked speculation that could seek to renegotiate his takeover of Twitter, saying a viable deal at a lower price wouldn’t be “out of the question.” Tech-stock valuations in general have fallen since the offer was announced, with the Nasdaq 100 down 14%.
For Jean-Francois Comte, managing partner at merger arbitrage firm Lutetia Capital, he might have a “fairly strong hand” if no rival bidders come through.
While the deal -- in which the world’s richest man agrees to take a company private with anything-but-standard financing and then hints at a renegotiation -- has no real precedent, there have been some where the buyers closed the transaction with reduced offers.
Take LVMH’s deal with Tiffany & Co (NYSE:TIF)., where it purchased the jewelry retailer at a reduced price of $131.50 share, down from the original $135. LVMH had said it couldn’t go through with the deal, citing a request from the French government amid a trade dispute with the US. Also, Advent International Corp. came back to the table to buy Forescout Technologies (NASDAQ:FSCT) Inc. at a discount to the original $1.9 billion price, blaming the pandemic.
2. Musk Walks Away From a Deal
If Musk abandons his bid, Twitter would have to be evaluated on the basis of its fundamentals, a prospect that could lead to weakness over the near term, analysts said.
Truist Securities estimate Twitter shares would trade in the high $20s or low $30s without a deal, based on where it was trading prior to the offer, or a drop of about 20% from $37.39 at Monday’s close.
CFRA sees an even steeper potential decline. “Should a deal not transpire at all, we see significant downside risk as we value the company at about $26 on a standalone basis,” analyst Angelo Zino wrote in a note Monday. That represents a 30% decline from Monday.
Twitter’s board could sue to try to force Musk to close the deal as agreed, but that would be a long and costly fight.
3. Deal Goes Through as Agreed
This could be the best-case scenario for shareholders. Anyone who bought at the close Monday would reap a 45% return should the deal go through.
The very fact that such a return is on offer, though, is a sign of market skepticism. The $16.81 gap between Musk’s buyout price and the market value at the close Monday was the widest since the deal was announced.
Where it all goes from here is anyone’s guess. Only eight out of the 37 analysts covering the stock have moved their share price targets to Musk’s bid of $54.20, signaling that most are still unsure if the deal will go through.
“Twitter is not trading completely like a broken deal, but awfully close to one,” said Steve Sosnick, chief strategist at Interactive Brokers.
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