Sweet tweets

Twitter has priced its initial public offering modestly to avoid the fate of social-media rivals which plunged in value after their listings

PUBLISHED : Saturday, 26 October, 2013, 2:55am
UPDATED : Saturday, 26 October, 2013, 2:55am

Twitter's US$10.9 billion initial public offering valuation is as economical as its 140-character tweets.

The United States company is seeking a valuation of 9.5 times 2014 sales in its share offering next month, according to data released in a filing with the Securities and Exchange Commission this week and analyst projections. That is 27 per cent cheaper than the 12.9 times 2014 sales that Facebook is trading at, and 29 per cent lower than LinkedIn's 13.4 times sales, the data shows.

The discount Twitter is offering underscores how the six-year-old microblogging site is working to avoid the fate of Facebook, Groupon and Zynga, which all lost more than half of their value within six months of their share sales.

Twitter chief executive Dick Costolo has taken a different tack from the start, first by filing confidentially to go public to avoid the hype that drove up Facebook's pre-listing valuation, and now by pricing the company more modestly than some of its internet rivals. The moves have left Twitter positioned to capitalise on a revival in investor appetite for social-media stocks.

"It's fair to say they're learning from Facebook's mistakes," said Michael Scanlon, a managing director at Manulife Asset Management. . "It's hard to imagine this deal isn't oversubscribed and then they'll have to gauge what they think the opportunity is to increase the price."

Twitter is planning to sell 70 million shares - or a 13 per cent stake - at US$17 to US$20 each to raise as much as US$1.4 billion, according to a filing. The US$10.9 billion valuation at the top end of the range is based on the 544.7 million common shares outstanding after the flotation.

On a fully diluted basis, including restricted stock and options, Twitter will have about 695.2 million shares outstanding. By that measure, at the top end of the range Twitter would be valued at US$13.9 billion.

It’s fair to say [Twitter is] learning from Facebook’s mistakes

The sale would be the largest public offering for an internet company since Facebook debuted on the stock market in May last year and raised US$16 billion. At the time, Facebook was valued at US$81.3 billion based on the number of its common shares, or US$104 billion based on a fully diluted share count. The company rode a wave of hype and bumped up its offering price range to US$34 to US$38 after initially seeking US$28 to US$35.

Facebook priced its offering at 107 times trailing 12-month earnings on a fully diluted basis, making it more expensive than 99 per cent of all companies in the Standard & Poor's 500 Index at the time. The company quickly saw its stock sink below its US$38 debut price after listing, before finally rallying to close above that level in August.

For Silicon Valley, a successful Twitter offering will go a long way towards erasing the aftertaste from Facebook's float, which along with the poor stock market performances of Zynga and Groupon shattered confidence in consumer internet companies.

Following those offerings, venture capitalists and others shifted investment to technology businesses that sold their products to other businesses, said Nihal Mehta, the founder of LocalResponse and venture capitalist at Eniac Ventures. Now with Twitter's debut and Facebook trading above its offering price, confidence in consumer technology has revived.

"Twitter will help escalate all the other advertising-based consumer companies, and create potential for more to be born," Mehta said. "We're seeing more consumer deals than we ever have before."

While Twitter has more than doubled revenue annually, to US$534.4 million in the 12 months to September, user growth is slowing, filings show. The service had 231.7 million monthly users in the third quarter, up 39 per cent from a year earlier. That compares with 65 per cent growth in the previous year.

Average revenue per user is less than half Facebook's, filings show, with Twitter's at 73 US cents, based on sales of US$168.6 million in the third quarter, compared with Facebook's US$1.60 monthly average.

Losses have also widened. For the third quarter, Twitter said its net loss expanded to US$64.6 million from US$21.6 million a year earlier.

Twitter is selling 70 million shares in the offering, with an additional 10.5 million available to underwriters should they choose to exercise their option to buy shares. The offering will dilute the stakes of some holders, with co-founder Evan Williams' stake falling to 10.4 per cent from 12 per cent after the sale, the filing shows. Williams is the single-biggest individual shareholder.

Employees who are not executives will be eligible to sell almost 10 million shares as early as February 15. All stock held by executives and directors is subject to a standard 180-day lock-up period.