On July 13 we reported about the potential arbitrage opportunity arising out of the ongoing acquisition fight between Twitter and Elon Musk. Musk originally agreed to purchase a majority of the company for $54.20 per share, but has since attempted to withdraw from the deal. Barring a last minute settlement, the case will go to court in October.
To engage in arbitrage is to exploit price inconsistencies in an investment --- in this case, shares of Twitter. Currently trading at $41.45, the shares are around 30% below the price at which Musk agreed to buy them. If the deal goes through, Twitter shareholders will receive windfall profits because the agreed purchase price is so much higher than the market price. Thus it comes as no surprise that last Tuesday, the company’s shareholders approved the deal on September 13.
As the verdict date approaches, the spread between the market price and the acquisition price will continue to narrow. On July 13, when we originally reported about the arbitrage opportunity, the spread was 50%. Now, it is down to 30% as mentioned above. The merger arbitrage of Twitter shares will still look like an attractive opportunity for many investors, especially because of the perceived lack of opportunity elsewhere in the market.
However, if Musk prevails, Twitter shares will likely fall -- and how far is anybody’s guess. They will almost certainly fall well below the acquisition price of $54.20, and possibly settle somewhere around its current average analyst target price of $42.05. At today’s prices, the stock seems to be overvalued in terms of its price to earnings ratio of 165 and its price to book ratio of 5.4. So if the deal falls through, arbitrage investors may be stuck with overpriced shares in their portfolio without a clear driver for upwards performance.
The outcome of the case will likely depend on whether Musk can prove that Twitter concealed the number of fake users, or bots, that use the website. The company claims that the percentage is around 5%, but third party estimates range from 9 to 15%. Musk will attempt to have the takeover agreement vacated on the grounds of a material misstatement of fact on Twitter’s part (the company’s valuation is tied to the number of real users it has).
In Twitter’s favor is the fact that Musk failed to reveal messages between himself and his banker Michael Grimes, which reveal that the two were discussing the possibility of backing out of the deal as early as May 8. This shows that Musk’s concern with the number of bots was possibly pretextual and that in fact, he wanted out of the deal almost as soon as the ink dried.
At Market Interference, we are closely monitoring the developments surrounding Musk’s acquisition of Twitter, and the potential payout for arbitrage investors. If you don’t want to miss our next article, subscribe to our free newsletter today!
