Here's how deep Twitter's slide could get if Google, other bidders are out
Here's how deep Twitter's slide could get if Google,
other bidders are out
Published: Oct 6, 2016 11:05 a.m. ET
By BARBARA KOLLMEYER & CAITLIN HUSTON
Deep-pocketed suitors are reportedly dropping their bids
for Twitter - a blow that could deal a hefty hit to the social media company's
shares, analysts said Thursday.
Twitter Inc. TWTR, -20.45% traded down 16% to $20.81 a
share at the open of trading, after a late-session drop Wednesday that
coincided with a Recode report, citing unnamed sources, saying Alphabet Inc.'s
GOOGL, +0.50% Google isn't currently
planning a bid.
Apple Inc. AAPL, +0.97% and Walt Disney Co. DIS, +0.56%
DIS, +0.56% were
also struck off the buyers' list by Recode, again citing
unnamed sources.
A Google spokesperson declined to comment. Disney and
Apple did not immediately return a request for comment.
The social media messaging service was all set to field
bids this week, The Wall Street Journal reported Tuesday, noting another big
name in the pot, Salesforce.com CRM, +3.93% as the likely front-runner.
Twitter's overnight tumble
The frenzied buyout talk kicked off with a Sept. 23
report that Salesforce was considering an offer for Twitter, prompting TWTR
shares to jump 21%.
Twitter has rallied from $18.63 the day before that
report, to $24.87 at Wednesday's regular-session close, which was the highest
finish since last December. That move also brought shares closer to Twitter's
IPO price of $26.
Salesforce shares slid 8% Wednesday, but were up some
3.6% early Thursday, after analysts at Mizuho trashed the idea of a Twitter
bid, saying it could destroy up to 25% of the cloud-computing company's value.
It would take Salesforce two to three years to recoup that value, the analysts
said.
Google has the deepest pockets among the potential
suitors, said Peter Garnry, head of equity strategy at Saxo Bank. That's why
loss of the search engine's interest is perhaps the biggest disappointment.
The blow of a Google bow out: "We have always
thought Google was the best fit for Twitter, for the simple reason that Google
never really carved out a main, dominant space in social media...and Facebook
FB, +0.38% cornered the whole
market," said Garnry. If Google is indeed out of the game, then Disney
makes the most sense as the second-choice suitor, he added.
On the upside, Disney's ownership of ESPN would make it
easy to integrate Twitter, whose biggest asset right now is streaming sporting
events.
However, costs again are of chief concern. The
entertainment giant generates around $7.8 billion in free cash flow for Disney,
so paying close to $20 billion for Twitter would be a sizable deal, and present
higher risk than for someone like Google, said the strategist.
Garnry owns Twitter in a small equity portfolio at Saxo,
which he said they bought on May 11 at $14.56 per share. He said they were
encouraged by how fast the business was turning around with free cash flow. But
user engagement was, and still is, a problem. The sporting events business for
Twitter was also a huge draw.
"They really have a crown jewel there, and the
question is if they can turn it into a money machine to justify the
valuation," he said, adding that his firm has always thought Twitter could
unlock value if it sheds some of its
4,000 employees.
With Disney and Google reportedly out of the bidding
process, James Cakmak, an analyst with Monness, Crespi, Hardt, is unsure that
Salesforce acquisition makes sense or if the company could even afford Twitter.
"If Salesforce is that last potential bidder,
Twitter may be destined to remain independent until a more reasonable valuation
is available," Cakmak wrote.
Cakmak said he believes Twitter will be looking for an
all-cash deal and he doesn't believe Salesforce has that cash. Salesforce had
$1.1 billion in cash and cash equivalents as of July 31.
With $17 billion in revenue, Cakmak said he believes the
Twitter acquisition price would be $50 per monthly active user or $110 per
daily active user.
If there were multiple bidders, Cakmak said there could
have been a possible
$20 billion acquisition price. But with big suitors reportedly
dropping out, he sees more downside risk to the valuation.
Salesforce could use Twitter as a data asset if it
integrates it with its marketing cloud, but Cakmak said he doesn't believe that
would be the most helpful solution for Salesforce.
Downside danger for Twitter shares: Ahead of what was
shaping up to be a bumpy day for Twitter shares, Garnry drew his line in the
sand: Twitter is a stock that is priced to perfection if you consider that an
acquisition by Google, if it happens, is already baked in.
"If it goes to $23 today, we are out," he said,
adding that given the huge volatility around Twitter shares, they could easily
go lower than that.
He said Silicon Valley was getting interested in Twitter
when it was trading around $15, but with shares at $24-$25 and a $17.5 billion
valuation, the limit on potential upside is getting close. And he added, the
pressure will be on Twitter to churn out a pretty good set of earnings results
on Oct. 25.
That brings Garnry to another point. He said it'd be
crazy for a suitor to buy Twitter ahead of those results, unless they were
privy to credible, related data.
Chris Bailey, founder of Financial Orbit, said Twitter
shares could drop more than 10% Thursday, which was already happening, as a
market that had gotten ahead of itself, tries to adjust.
"Fundamentally the numbers are not supportive of a
share price here, so there is a balance game between the value of info/the
franchise and the actual profit/cash flow numbers. A mid-teens share price
seems to offer some support between these two aspects," he said.
"My gut: Twitter gets taken out in the next couple
of years by a top-tier tech name recognizing the value of real-time
info/eyeballs. Price? $20s. My trading instinct is to buy every couple of
[dollar moves] below $20, i.e.
$19s, $17s, $15s..." Bailey said in emailed
comments.
Sven Henrich, otherwise known as Northman Trader, says
Twitter has been in a "constant downtrend" since the IPO, making a
"double bottom" in February and May. But he noted that shares are now
back near that listing price.
"In lieu of buyout [talk], the stock must hold
$20/$21 or risk heading back into the $14-$19 range," he said, in emailed
comments.
et-with-reported-loss-of-google-other-big-bidders-2016-10-06
Comments
Post a Comment