One merger arbitrager says the Twitter deal’s conditions are “seller-friendly.”
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Twitter shares are falling Wednesday as investors worry that Elon Musk could try to extricate himself from his $44 billion deal to buy the social media company by paying a $1 billion termination fee.
Twitter shares (TWTR) are off 2.6%, or $1.31, to $48.37 in early trading, and now offer 12% upside to the deal price of $54.20 a share. The annualized return is even higher, at more than 20% to the expected deal closing date around Oct. 1.
Twitter shares were down 3.9% Tuesday in reaction to a 12% drop in Tesla shares (TSLA). The fall in Tesla stock rattled Twitter investors by raising some concerns about Musk’s financing for the Twitter deal, which involves a $12.5 billion margin loan and a $21 billion equity commitment. Tesla is up 4.7%, to $917.75, in early trading Wednesday.
Some Tesla investors aren’t happy with the deal, viewing it as a distraction for the Tesla CEO.
The merger document, released late Tuesday, states that Musk must pay a $1 billion termination fee if he fails to complete the transaction. This has spurred speculation that he may decide to walk from the deal if Tesla stock comes under renewed pressure.
However, merger arbitragers say that it’s not so simple for Musk to abandon the deal. The merger document contains language, including that under section 9.9, about “specific performance” that Twitter could use to seek to compel Musk to complete the deal.
Among the clauses of agreement (section 6.10) that seek to enforce the deal is that Musk appears to be personally on the hook for the margin agreement, which is secured by part of his Tesla stake.
One arbitrager tells Barron’s that the “conditions to his obligation are pretty tight and seller-friendly, including the MAC (material adverse change) clause, and his obligation to fund the equity commitment.”
Even with Twitter stock under pressure, investors appear to be putting odds of considerably more than 50%–and perhaps close to 75% — on the deal closing.
Twitter shares could fall sharply—perhaps into the mid-$30s—if the deal falls apart. That’s below the price of around $40 on April 1, the day before Musk revealed his stake of about 9%. Tech stocks have since come under pressure, including ad-supported giants Alphabet (GOOGL) and Meta Platforms (FB).
The implied odds of the Twitter deal closing can be calculated by comparing the upside from the current stock price to the deal price against the expected drop if the deal falls apart. If the upside is less than the projected downside, the deal odds are above 50%.
The transaction isn’t expected to face significant regulatory issues.
Write to Andrew Bary at [email protected]
