Explainer-Can Elon Musk renegotiate a cheaper price for his Twitter deal? By Reuters



© Reuters. FILE PHOTO: Elon Musk’s Twitter profile is seen on a smartphone positioned on printed Twitter logos on this image illustration taken April 28, 2022. REUTERS/Dado Ruvic/Illustration

By Greg Roumeliotis

(Reuters) – Twitter Inc (NYSE:) shares have plunged to their lowest degree for the reason that social media firm agreed to promote itself to Elon Musk for $44 billion on April 25, elevating questions over whether or not the world’s richest individual will attempt to renegotiate the deal.

On Tuesday, the implied chance of the deal closing on the agreed value fell under 50% for the primary time, when Twitter shares dropped under $46.75. That’s midway between the deal value and the value of the shares earlier than Musk revealed he had amassed a stake within the social media firm on April 4.

The shares closed at $47.26, giving the corporate a market worth of $36 billion.

Information that Musk would carry a ban on former President Donald Trump’s Twitter account, whereas vital politically, didn’t transfer the inventory.

Twitter shares have plunged together with the broader collapse in know-how shares, as buyers fretted over inflation and a attainable financial slowdown. Some buyers, corresponding to brief vendor Hindenburg Analysis, have speculated about whether or not Musk would attempt to negotiate a decrease deal value earlier than closing.

Musk has not indicated he’s planning to re-open negotiations and his representatives have declined to touch upon the problem.

Listed here are solutions to some key questions.

WHY WOULD MUSK WANT TO RENEGOTIATE THE DEAL?

Musk has an estimated web price of just about $240 billion in response to Forbes, but most of his wealth is tied up in shares of Tesla (NASDAQ:) Inc, the electrical automobile maker he leads.

Musk has already moved to boost some money to fund the acquisition of Twitter. He bought $8.5 billion price of Tesla shares and took out a $12.5 billion margin mortgage secured towards his Tesla inventory. Final week he lowered that margin mortgage to $6.25 billion after bringing in co-investors. Musk stated in a regulatory submitting he might search extra funding for the deal.

Whereas Musk has stated he doesn’t care in regards to the economics of shopping for Twitter, some buyers suppose the 27% drop in Tesla shares since he revealed his stake is pushed partly by considerations he might should promote extra shares. Due to this fact Tesla’s inventory can be underneath much less strain if Musk can negotiate a decrease acquisition value. Some co-investors might egg him on in the event that they grow to be involved about overpaying.

HOW COULD MUSK NEGOTIATE A LOWER PRICE?

Musk can threaten to stroll away from the deal except Twitter’s board agrees to reopen negotiations. He’s contractually obligated to pay a $1 billion break-up price, however Twitter must sue to get greater than that in damages or attempt to pressure Musk to finish the deal.

There’s loads of precedent for a renegotiation. A number of firms repriced agreed acquisitions when the COVID-19 pandemic broke out in 2020 and delivered a world financial shock.

In a single occasion, French retailer LVMH threatened to stroll away from a cope with Tiffany & Co (NYSE:). The U.S. jewellery retailer agreed to decrease the acquisition value by $425 million to $15.8 billion.

Simon Property Group Inc (NYSE:), the most important U.S. mall operator, managed to chop its buy value of a controlling stake in rival Taubman Facilities (NYSE:) Inc by 18% to $2.65 billion.

ARE THERE RISKS TO TRYING TO RENEGOTIATE?

There is no such thing as a certainty that the technique would work, and it might find yourself costing Musk more cash.

First, Musk must persuade Twitter he would actually stroll away. Then there are authorized hurdles, together with a “particular efficiency” clause that the social media firm can cite for a decide to pressure Musk to finish the deal.

Acquirers who lose such a case are virtually by no means compelled to finish an acquisition, however goal firms can search financial aid for the value of the deserted deal.

Corporations which have fought acquirers in court docket embody medical know-how agency Channel Medsystems Inc, which sued Boston Scientific Corp (NYSE:) for making an attempt to stroll away from their $275 million deal. In 2019, a decide dominated the deal ought to be accomplished and Boston Scientific paid Channel Medsystems an undisclosed settlement.

Acquirers in search of an out typically flip to “materials hostile impact” clauses of their merger settlement, arguing the goal firm has been considerably broken. However the language within the Twitter deal settlement, as in lots of current mergers, doesn’t permit Musk to stroll away due to a deteriorating enterprise surroundings, corresponding to a drop in demand for promoting or as a result of Twitter’s shares have plunged.

Musk additionally waived his proper to hold out due diligence when he negotiated the Twitter deal, making an attempt to get the corporate to simply accept his “finest and last” supply. This makes it tougher for him to argue in court docket that Twitter misled him.

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