Twitter (TWTR) Could Use $1.3B Raise for Strategic Acquisition - Analyst

Twitter, Inc. (NYSE: TWTR) sold off over 1% in after-hours trading Wednesday after the company surprised Wall Street with a $1.3 billion convertible note offering. Despite the initial reaction in the stock, SunTrust Robinson Humphrey analyst Robert Peck was positive on the move, calling it a "prudent call" from new CFO Anthony Noto.

In addition to being cheap money, Peck suspects Twitter may have more strategic uses for the proceeds, noting M&A activity remains robust in ad tech, video, curation, ecommerce, and analytics. The raise will push Twitter's balance sheet cash to approximatly $3.5 billion, the analyst estimates.

The analyst said two of the more interesting angle Twitter could consider is to better monetize its large "off-line" reach or the ~11% of users who access Twitter via automatic refresh on 3rd party systems. An asset like Flipboard may be interesting considering its expertise in user friendly content aggregation across multiple platforms and content types. "Common investors between Twitter and Flipboard, like Jack Dorsey, Goldman Sachs, and Rizvi could support an idea like this," Peck said.

Beyond M&A, Peck feels CFO, Anthony Noto is astutely taking advantage of an attractive convert market (recent deals in PCLN, AOL) and overlaying a call spread to minimize dilution and synthetically create a more straight debt-like instrument. "We estimated that AOL effectively raised capital at ~1.1% for 5-years including hedge costs (~1.8% including issuance costs) if that convert expired out of the money," Peck said. "AOL shareholders would realize a 13% compound return, net of 6% dilution, if that convert expired at the money."

The firm maintained a Buy rating and price target of $58.

For an analyst ratings summary and ratings history on Twitter, Inc. click here. For more ratings news on Twitter, Inc. click here.

Shares of Twitter, Inc. closed at $52.91 yesterday.

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