- NYSE: TWTR
- Recent PPS: $17.56 (10/10/16 closing PPS)
- FD Shares Out: 698.33 million (2Q16)
- Market Cap: $12.263
- Net Cash: $2,393
- Enterprise: $9,870
I wrote up TWTR as a quick special situation 'risk arb' trading idea on 10/7 here via the Instablog, and have subsequently made a couple of different 'journal' entry updates. After reading John Hempton's excellent piece this morning, however, I thought a quick LBO analysis of TWTR would be more appropriate for the general SA board...
Please read Hempton's piece in its entirety; but in summary he believes that the $1.5 billion of Opex growth since 2013 is rather extraneous, as there has not been next to no commensurate rise in the equality of user experience (e.g. spam bots, porn, etc. are still rampant). He personally believes a 50% operating margin is achievable, but that 40% is more likely under a serious operator.
Using the recent high of ~$25 as a take-out PPS, and Hempton's 40% 'core' EBIT margin (EBITM), let's run thru a quick LBO analysis.
- New Gross Leverage: 7x (on LTM Revenue x 40% EBITM)
- Revenue Growth: 5%
- Interest Rate: 7%
- Tax Rate: 25%
- 'Exit' EV/NOPAT: 20x
- PE Equity Check: $8,930 (Market Cap - New Gross Debt - 2/3 of Net Cash)
Using the inputs above on LTM Revenue of $2,476 million, a private equity firm would generate a 5-year IRR of approximately 12% per annum. While materially below the standard 20% PE requirement, there are some puts and takes...
For example, if top-line growth is 10% per annum the 5-year IRR rises to just under 21%; or if the EBITM is 45% the 5-year IRR rises to 17%.
My guess is that some combination of higher-than-assumed revenue growth and EBITM is what drives the IRR to more acceptable levels...as the 'threat' of a deep-pocketed international strategics more than likely keeps the purchase price from falling much below the $25 level.
In summary conclusion:
- Margin expansion opportunity makes TWTR a viable LBO candidate
- Conservative assumptions yield a 12% 5-year IRR to PE
- Combination of higher-than-assumed revenue growth and EBITM yield IRR closer to the normal 20% PE level
- Deep-pocketed international strategics likely keep the PE take-out PPS from falling much below the recent high of $25
The views and information I provide are for informational purposes only; are not meant as investment advice; are subject to change without notice of any kind; do not constitute an offer of products or services with regard to any fund, investment scheme, or pooled investment; nor do they in any way, shape or form represent the views of my employer.
Disclosure: I am/we are long TWTR.