Elon Musk's Twitter deal; The run on Tether is underway; My latest COVID update
1) In the August 2020 issue of Empire Stock Investor, we recommended readers buy shares of Twitter (TWTR), with a reference price of $37.38. (You can subscribe for a full year for only $49 – and find out how to get access to the entire portfolio – right here.)
After the company accepted Tesla (TSLA) CEO Elon Musk's bid of $54.20, we told our subscribers on May 4 to sell at $50.59, locking in a 35% gain, writing:
We think it's best to exit here because we think there is a real possibility that the deal could fall apart.
Sure enough, with comparable stocks down a ton since his offer, Musk is engaging in all sorts of shenanigans to try to get a lower price, which Bloomberg columnist Matt Levine has covered in great (and hilarious) detail – see Elon Musk Trolls Twitter and Elon Musk Does Not Care About Spam Bots. Excerpt:
He knew about the spam bot problem before signing the merger agreement, as we know because he talked about it constantly, including while announcing the merger agreement. If he didn't want to buy Twitter because there are spam bots, he should not have signed a contract to buy Twitter. No new information has come to light about spam bots in the last three weeks.
What has happened in the last three weeks? Well, the prices of tech stocks have gone down, making the $54.20 price that Musk agreed to look a bit rich. (Snap, a social-media competitor to Twitter, is down more than 30% since Musk made his offer on April 13.) And the price of Tesla stock, which he is relying on to finance part of the purchase price, has also gone down, making him poorer and making the $54.20 price look even more expensive. (Tesla is down almost 30% since he made his offer.)
So he is angling to reprice the deal for straightforward market reasons. But that is very clearly not allowed by the merger agreement that he signed: Public-company merger agreements allocate broad market risk to the buyer, and he can't get out just because stocks went down.
So he is pretending that he wants to reprice the deal for other reasons. He is not pretending very hard – the poop emoji is not going to hold up in court! – but he's doing enough to confuse the public and give his fans a pretext to believe that he is really the victim here.
It costs Musk nothing to engage in a bunch of saber-rattling that he's going to walk away from the deal, but as this Wall Street Journal article points out, Is Elon Musk Actually Going to Buy Twitter? Can He Just Walk Away?, it's not so simple:
Can Mr. Musk just pay Twitter the $1 billion breakup fee to get out of the deal?
Not necessarily. There are three clear scenarios in which this could happen, and possibly more. If regulators try to block the deal or the debt financing falls through, he would likely have an out. The third is if he can show Twitter has significantly changed for the worse since the deal was agreed upon, under a concept known as a "material adverse effect."
I think the deal will go through because: a) Musk really wants to own Twitter... and b) his lawyers will make him aware that he'll likely have to pay many billions in damages if he reneges on the agreement he signed. But I do think there will be a negotiated agreement on a modestly (maybe 10%) lower price, which is what happened in this case, as described in the WSJ article linked above:
Even when contract terms are clearly spelled out, more often than not deal clashes end in negotiated settlements that can include a price cut or one-time payments.
In 2020, luxury-goods conglomerate LVMH Moët Hennessy Louis Vuitton tried to back out of a deal to buy Tiffany for $16.2 billion after the pandemic hurt demand for high-end jewelry. Tiffany sued to enforce the agreement and LVMH countersued, arguing the business had been so deeply damaged that their original agreement was no longer valid.
The two sides later agreed to cut the price by a relatively modest $430 million and settle related litigation.
2) A quick update on crypto "stablecoin" Tether, which I last wrote about in Friday's e-mail:
Tether over the next month or so is the best short I've ever seen (and I've seen a lot of great shorts!) because your maximum loss is less than 1%, yet it could go down massively (80%?).
What I think is going on behind the scenes is that the issuers of the Tether tokens, Tether Limited, which in turn is controlled by the owners of Bitfinex, are frantically selling whatever liquid assets they have and buying Tether at $1 (see: Tether stabilizes after burning 3 billion tokens amid redemptions) in a desperate attempt to prevent it from "breaking the buck" – because they know once it does so, look out below...
But I think Tether Limited is going to lose this battle because: a) every Tether owner with an ounce of brains is selling like mad... and b) I don't believe the bulk of their reserves are in government bonds, commercial paper, and other secure, liquid assets.
Tether Limited publishes this "transparency" report on its website, which looks very official:
But there are three problems...
First, an "assurance opinion" is not an audit. In fact, as this article notes, Investors withdraw over $7 billion from tether, raising fresh fears about stablecoin's backing:
Tether has faced repeated calls for a full audit of its reserves. In July 2021, the company told CNBC it would produce one in a matter of "months." It has still not done so.
Second:
These "attestations" produced by Tether each quarter are signed off by MHA Cayman, a Cayman Islands-based firm which has only three employees, according to its LinkedIn profile.
Finally, the site shows that the amount of Tethers outstanding is $74.2 billion as of earlier this morning, but this is down from $83 billion a week ago, which shows that exactly what I predicted would happen ("every Tether owner with an ounce of brains is selling like mad") is, in fact, happening.
The company is trying to put on a brave face (per the article linked above):
Responding to a Twitter user who urged Tether to release a full audit, Paolo Ardoino, the company's chief technology officer, insisted its token was "fully backed" and had redeemed $7 billion in the past 48 hours.
"We can keep going if the market wants, we have all the liquidity to handle big redemptions and pay all 1-to-1," he said.
But behind the scenes, the folks at Tether Limited must be soiling themselves, because I don't think there's any way they can come up with the cash for much longer to continue buying back Tethers and staving off the dreaded "breaking of the buck."
3) I continue to follow developments with COVID-19, but not as closely anymore... in part because I've been really busy with other things, but mostly because, as I've been writing since as far back as December 14, COVID-19 has become endemic.
Here is a link to what I sent to my coronavirus e-mail list yesterday afternoon (to sign up for it, simply send a blank e-mail to: cv-subscribe@mailer.kasecapital.com). In it, I covered:
- The U.S. surpasses 1 million deaths (with various analyses of who died, etc.)
- The U.S. has the worst death rate among peer countries
- What Australia did right
- We've reached herd immunity
- National and New York City data
- This is the flu
- Vaxxed vs. unvaxxed hospitalization rates
- Various articles of interest
- Dr. Katelyn Jetelina's COVID update
Overall, I'm not worried about the latest flare-up in cases.
In response to my e-mail, one of my friends asked if she should get a second booster shot (fourth shot overall). I replied:
If you've had COVID in the not-too-distant past (as I had, in late December), then I'd wait. Otherwise, I think it's a toss-up for people under 65.
For further commentary, I turned to my most trusted source, Dr. Kevin Maki, who replied:
I don't give personal medical advice, but will provide some thoughts about the factors that one might weigh in making a decision.
The cold/flu (and now COVID) season is generally October 15 to April 15. However, in the southern states there has been a spike in cases over the summer the last two years. I expect that to happen again, although thus far the highest concentrations of cases have been in the northern Midwest and Northeast.
For those 45-64 years of age without serious comorbidities, it is reasonable to consider waiting until September or October to get a fourth shot. I am 57 and I plan to wait until then unless I see a large uptick in cases in southwest Florida, where I spend most of my time. If that happens, I will get boosted again sooner.
A fourth booster seems to provide very strong protection for about three months and then weaker protection for a longer period thereafter. (By protection, I mainly mean prevention of severe illness.) Many people who have been vaccinated and boosted seem to get Omicron but it is typically mild.
My own goal is to be in the three-month window for the strongest protection during the next peak in COVID transmission. I expect that to be during the cold/flu season, but there is no guarantee that the history from the last two years with peaking case numbers in December to January will repeat. If I see a substantial rise in my area, I will schedule my fourth shot.
Thank you, Dr. Maki!
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.