Hindenburg Shorts Twitter: ‘Musk Holds All the Cards’

Nate Anderson’s short activist firm says the Tesla CEO can take the social media company private at a better price.

Illustration by II

Illustration by II

Elon Musk might agree with a short seller for once, following Hindenburg Research’s new short analysis of Twitter.

Nate Anderson’s Hindenburg, which emerged as a top short activist last year with its winning bets against a number of SPAC-related companies, said Monday that it is short shares of Twitter, which Musk is on the verge of taking over.

But Anderson isn’t joining with his fellow short sellers, nor plenty of others on Twitter, in demonizing the Tesla CEO or bemoaning the pending takeover.

Instead, he’s arguing that Musk’s plan to take Twitter private is a good thing — but that Musk can do it for a better price.

Musk, who is notorious for his attacks on the short sellers that targeted Tesla, quickly responded to the Hindenburg report on Twitter. “Interesting,” he tweeted. “Don’t forget to look on the bright side of life sometimes!”

Hindenburg shot back: “We’re optimists. We think you get this done. Just at a more reasonable price. Your existing $TSLA shareholders will thank you.”

The Hindenburg report argues that both the market and Twitter’s performance have deteriorated substantially since Musk disclosed a formal offer to take the social media company private on April 14. Meanwhile, the debt load to accomplish the deal is extraordinarily high, and the effort is hurting Musk’s other company, Tesla.

Twitter shares have continued to rise within striking range of Musk’s accepted offer of $52.40 per share. At the same time, the Nasdaq composite has plummeted about 17.6 percent since the closing price prior to Musk’s disclosure of his initial 9.2 percent stake on April 4, the report said.

“Twitter has outperformed the Nasdaq by [about] 43 percent since Musk disclosed his initial position, setting the stock up for a material downside reversion should Musk walk away from the deal,” the report said. “As a result of these developments, we believe that if Elon Musk’s bid for Twitter disappeared tomorrow, Twitter’s equity would fall by 50 percent from current levels. Consequently, we see a significant risk that the deal gets repriced lower.”

Without a deal, Hindenburg suggests that Twitter stock would be worth about $31.40.

According to the report, the Twitter board quickly accepted Musk’s offer because “competing bids failed to materialize.”

But the market selloff isn’t the only thing auguring for a lower deal price, according to Hindenburg.

Three days after Twitter announced it had accepted Musk’s bid, Twitter “reported weak earnings, disclosing its slowest revenue growth in six quarters, which missed estimates, and an overstatement of its daily active user count,” the Hindenburg report said.

“Twitter acknowledged overcounting about 1.9 million global users in Q4 2021, roughly 0.88 percent of its total user base. This admission comes barely 4 months after Twitter’s recent $809 million securities fraud settlement over past issues relating to overstatement of users,” the report added.

It also noted that Musk himself has said that “the platform is flooded with bots, spam, and scam accounts that likely inflate its genuine user metrics even further.”

The financing for Musk’s Twitter takeover is also tricky. The deal, as it stands, is heavily reliant on debt — another negative for the current price. Hindenburg cites a Reuters estimate of leverage at a “nosebleed 8.6 times EBITDA.”

It also quotes investment bank Cowen as saying that “the current deal for Twitter envisions an equity commitment of $20.1 billion from Musk and $7.1 billion from other investors with the remaining $19.25 billion set to be funded through debt.”

Even though Musk has recently obtained new equity commitments from investors to lower the debt ratio, “a financing gap of about $13.9 billion in equity and margin debt has yet to be filled,” according to the report.

Moreover, Musk’s commitment is backed by sales of his Tesla shares, as well as their use as collateral for the loan. Tesla shares have fallen by more than 20 percent since April 26, when Musk began selling his shares.

“A lower deal price with less excessive leverage will place both Twitter and Tesla on more solid financial footing,” argued Hindenburg.

Hindenburg does agree with Musk that Twitter would better serve the public as a private company, noting that it “has played a key role in democratizing financial research, a field that large Wall Street banks monopolized for decades.”

“In our view, Musk holds all the cards here,” the report said. “The board quickly agreed to the deal when conditions were vastly more favorable, and we think they’d make the right decision again when faced with the present reality,”

Whatever cards he holds, Musk is playing them close to the vest. He may find Hindenburg’s analysis “interesting,” but the market doesn’t seem to know what to believe. Twitter fell 3.6 percent Monday, just shy of the Nasdaq’s 4 percent slide. Meanwhile, Tesla continues to bear the brunt of the deal; it fell about 9 percent Monday.