Carlson Capital’s Jesse Ho Sees Minimum Price Of $44/ Share In Elon Musk’s Twitter Buyout

Carlson Capital’s Black Diamond Arbitrage Partners generated a net return of -0.91% for the second quarter, bringing its first-half return to -1.52%. The fund’s special situations and other event-driven investments drove the loss, detracting 84 basis points. Its merger arbitrage positions detracted 24 basis points from the quarterly return.

Twitter offer unlike any other deal

In his second-quarter letter to investors, Carlson’s Event-Driven chief Jesse Ho comments on TeslaTSLA
CEO Elon Musk’s high-profile attempt to get out of the $44 billion offer he made to buy Twitter. He states that it is “certainly unlike any deal we have ever followed.” In mere weeks, Musk went from clinching the deal to trying to terminate it — all while trolling Twitter on its own platform.

The Carlson fund started building a position in Twitter during the second quarter, but its sizing and hedging reflected its base case assumption that litigation was inevitable. Now that the litigation phase has commenced, Jesse believes the facts and law will “conspire” to force Musk to honor his commitment to buy the social network.

However, he also expects Twitter to accept a price cut, reflecting its desire to avoid a trial, although Jesse believes it would be heavily favored to win the case if it went to trial. He pointed out that litigation is always risky, but if Twitter is going to face off against Musk in court, he thinks it “should be thrilled to do it in Delaware.”

Ho’s base case for Twitter

Ho describes Delaware’s Court of Chancery as having “a well-developed body of business law and extremely experienced and capable judges.” It also has a reputation for enforcing contracts. Hr believes that if Twitter and Musk do not settle before trial, the case could be one of the most important, if not most-followed contractual disputes in the history of Delaware’s Court of Chancery, which was established in 1792.

Given the stakes, he believes any judge will be careful and look to past precedent, which would favor Twitter given the heavy burden of proof Musk must carry to prove that it had breached their agreement. Ho’s base case assumption is that Twitter will accept a modest price cut to avoid the time, uncertainty and risk associated with a trial.

He recalled that the steepest price cut on such a case in recent memory was the 18% price cut Simon Property GroupSPG
“extracted” from Taubman CentersTCO
in 2020. Even that scenario would imply a price for Twitter above $44 per share — representing almost 30% upside.

Biggest holdings, contributors and detractors

As of the end of June, the Carlson fund’s top merger arbitrage holdings were Meggitt / Parker-HannifinPH
, Vifor Pharma / CSL, Swedish Match / Philip Morris, AlleghanyY
Corp., and Biohaven / PfizerPFE
. The top event-driven and special situations holdings were its SPAC basket, Cascades / industry hedges, Vivendi, Liberty Media / Sirius XM, Live Nation EntertainmentLYV
, and Glatfelter / industry hedges.

During the second quarter, the Carlson fund’s largest contributors were Swedish Match / Philip Morris, Meggitt / Parker-Hannifin, SciPlay / Light & Wonder, Biohaven / Pfizer, and Coherent / II-VI. On the other hand, its largest detractors were Avast / NortonLifeLock, Glatfelter / industry hedges, Vonage HoldingsVG
/ Ericsson, Cascades / industry hedges, and Vifor Pharma / CSL.

Michelle Jones contributed to this report.