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03 May 2022

Market Round-Up

Tesla chief, Elon Musk, agreed a US$44bn bid takeover of Twitter this week, giving the world’s richest man control of the influential social media platform that is home to some 200 million users. Musk has often criticised the company for not using its social media supremacy to utilise the platform as a space for free speech. By taking charge of Twitter, he hopes to transform it as a private company and unlock its potential for freedom of expression to allow matters to be debated that, he views, are “vital to the future of humanity.” He has also promised to improve the platform by enhancing it with new features, “making algorithms open source to increase trust, overcoming the spam bots and authenticating all humans.” Republicans are hopeful that the amendments will see Donald Trump return to the platform after being permanently banned in 2021 for repeatedly breaching Twitter’s rules around hate speech and misinformation. However, he has asserted that he will not return and will instead communicate via his own social media venture, Truth Social.

The three weeks prior to the deal involved a series of unexpected and controversial actions by Musk in which he became one of the company’s largest shareholders by taking a 9% stake. From this, he was offered a board seat, however he rejected it. Twitter attempted to prevent the takeover by implementing a ‘poison pill’ with the intention to limit Musk’s ability to gain a substantial holding. Despite the board’s initial opposition to the takeover bid and weeks of speculation over Twitter’s future, the company accepted his offer to buy all shares for US$54.20 each on 25th April after Musk confirmed a funding package including US$21bn of his own money, in addition to US$25.5bn of debt funding from Morgan Stanley and other financial institutions. The board of directors has unanimously approved the deal which is expected to close before the end of this year, pending regulatory sign-off and approval from shareholders.

A large reason for the company’s directors’ change of heart toward accepting the deal, aside from the funding package, was the vast amount of calls they received from some of its largest investors, both active and passive, pushing them to accept the offer. The investors had strong conviction that the stock price would not rise higher than Musk’s bid offer, especially in the short term. The purchase price was a 38% premium to the company’s closing price on 1st April, the day before the revelation that Musk had secured a 9% stake in the company. The transaction would also deliver a substantial cash premium. If the deal is completed, it will be one of the largest leveraged buyouts on record.

Employees, on the other hand, are worried about the future of the company, with Musk floating the possibility of shutting Twitter’s San Francisco headquarters while also making several other contentious suggestions, such as paying board members a salary of US$0. Musk has been known as a harsh manager who will seek to fire people on the spot when they are not onboard with his way of thinking. This is unlikely to bode well given engineering teams have spent years building tools to fight spam, disinformation and hate speech which Musk now seeks to retract.

The owner of high street fashion chain Primark, Associated British Foods (ABF), has announced that it will need to raise prices to offset the impact of rising inflation which is denting profit margins. Primark is known for its cheap clothing, however, higher shipping and container costs, increases in the prices of energy and raw materials, and wage inflation may change this perception. This marks another challenge ahead for ABF as Primark’s sales and profits have just returned to pre-Covid-19 levels. Operating profit margins at the discount fashion chain are set to drop from 11.7% in its first half to roughly 10% for the full year. As Primark has no e-commerce operation, the easing of lockdown restrictions and the opening of new stores largely benefitted the company in which new-store sales ensured Primark’s sales were up 59% year-on-year with adjusted operating profit of £414m against just £43m in the same period last year. That said, same-store sales are still down on pre-Covid-19 levels — by 8% in the UK and 14% in Europe. Rising costs will not help this situation.

With a commitment to remain the best value fashion retailer, Primark will continue to open new stores overseas, particularly in the US and southern Europe. There have been significant improvements in same-store sales in recent weeks as travel and beauty-related lines have increased in popularity, providing hope. Higher costs are not isolated to Primark; they are also being felt across ABF’s other businesses including the likes of Allied Bakeries, Ryvita, Twining’s teas and Dorset Cereals. ABF’s food business is showing a clear struggle in tackling inflationary pressures as although sales were 6% higher in the first half at £4.34bn, adjusted operating profits fell 9% to £330m. Going forward, the Russian invasion of Ukraine has heightened the commodity and energy price increases for AB Foods and it therefore expects a greater margin reduction in its foods businesses than previously expected.Fellow Yorkshire-based supermarket Morrisons has also cut prices in recent weeks, reducing the cost of over 500 items.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
Market Round-Up
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