Twitter (TWTR) has never had a meaningful share repurchase program to speak of, but that's about to change. Following recent reports that activist investor Elliott Management had accumulated a $1 billion stake in the social media company and was about to agitate to oust CEO Jack Dorsey, Twitter announced this week that it had reached an agreement with Elliott Management, as well as private equity firm Silver Lake Partners.
As part of the deal, Twitter will kick off a share repurchase program. Here's what investors need to know.
Image source: Twitter. Image copyright Atsushi Nakamichi for Twitter, Inc.
Jack's not hitting the road (yet)
Elliott had secured a 4% stake in Twitter, but those shares were purchased in the open market. Silver Lake has agreed to purchase $1 billion in fresh 0.375% convertible notes due in 2025, which will beef up Twitter's balance sheet. The company had finished 2019 with $6.6 billion in cash.
The institutional investors are each getting a seat on Twitter's board of directors: Silver Lake managing partner Egon Durban and Elliott partner Jesse Cohn will be brought on. Twitter says it will continue searching for more independent directors in order to further improve corporate governance. Silver Lake and Elliott have essentially agreed to stay quiet and allow Twitter to pursue strategic objectives. Both investors have committed to not acquiring more securities that would result in possessing a stake greater than 4.9%.
Twitter is hoping to grow monetizable daily active users (mDAUs) by at least 20% in 2020, while also accelerating revenue growth and grabbing more share of the digital advertising market. mDAU growth has been accelerating, jumping 21% in the fourth quarter. The company says it will share more details at its analyst day in the fall.
However, if Twitter fails to execute on those initiatives, it's clear that Silver Lake and Elliott will call for Dorsey's resignation. The board is establishing a temporary committee made up of five independent directors (including Durban and Cohn) tasked with evaluating Twitter's leadership structure. The group will come up with a CEO succession plan and make recommendations around corporate governance, such as eliminating Twitter's staggered board, by year-end. In other words, Dorsey just bought himself some time to keep his job.
Under a staggered board, directors serve for varying terms and only certain directors go up for reelection by shareholders each year, which provides a defense against hostile takeovers and activist investors trying to quickly secure a majority of the seats.
As part of the agreement, Twitter will also initiate a $2 billion share repurchase program, which will be funded in part with Silver Lake's $1 billion investment.
A $1 billion bet on $41.50
It might sound peculiar for Silver Lake to invest $1 billion in order to help the tech company repurchase $2 billion worth of stock. Convertible notes are a popular investment instrument among institutional investors because the bond characteristics provide some downside protection, while the equity conversion rights represent upside if the stock takes off.
In this case, Silver Lake's conversion price is $41.50, according to documents filed with the SEC, suggesting that Silver Lake is bullish that the stock can climb that high through a combination of accretive buybacks and improved operational performance. Twitter already has about $1.8 billion of convertible notes in its capital structure.
