Summary
Digital World Acquisition SPAC agrees to a settlement with the SEC costing a civil fine of $18 million.
The deal with Trump Media and Truth Social appears close to actually closing after a painful period in purgatory.
DWAC stock at an ~$3.8 billion valuation is vastly overvalued for the diminished opportunity in the social media space.
Joe Raedle/Getty Images News
While Digital World Acquisition Corp. $Digital World Acquisition Corp(DWAC)$ appears poised to settle with the SEC in a plan to allow the SPAC deal to finally close, Truth Social is still struggling to make any real business progress. The social media platform owned by former President Donald Trump has seen a lot of its purpose as an independent platform disappear. My investment thesis remains ultra Bearish on the SPAC deal trading nearly 50% above the SPAC deal price after the big rally on the SEC settlement news.
Source: Finviz
SEC Settlement
Digital World Acquisition reached an in-principle settlement with staff of the SEC Enforcement Division. The settlement still has to be approved by the SEC Commission and involves an $18 million civil penalty along with a requirement to amend the previously filed S-4.
The news comes after 3 investors, including a board member, were arrested for alleged insider trading prior to the announced deal that the SPAC had reached a business combination agreement for Trump's media firm Trump Media & Technology Group ("TMTG"). The investors apparently earned over $22 million in illegal profits.
The news appears to set up Digital World to close the merger, but TMTG still has to agree to the settlement. The company apparently has a clause to void the merger on any action or claim exceeding $100,000, which the SEC settlement clearly exceeds.
The SPAC is trading at nearly $15, so TMTG is highly likely to still approve the merger. Digital World has a cash balance of $300 million held in a trust account at the end of 2022 providing plenty of cash to pay the settlement. Though, the company did lose $15 million last year and Digital World hasn't reported quarterly results for the 1H of 2023 yet.
The companies apparently disagree on the extension of the liquidation date by another 12 months to September 8, 2024. Such a disagreement should question whether TMTG is 100% on board with completing the business combination despite the positive implications of the stock price.
The original business combination was agreed to on October 20, 2021 and most SPAC deals only take 6 to 9 months to close. One would assume an SEC settlement would allow this deal to quickly close, assuming TMTG is still ok with the deal.
Platform No Longer Needed
A trifecta of events have recently occurred to reduce the need for Truth Social to even exist. The primary issue holding back Truth Social is that billionaire Elon Musk acquired Twitter and made the platform independent.
Just this last week, Musk actually highlighted how the platform was setting record views all while the platform was trying to control views to reduce system manipulation. The original post by Musk got an incredible 569.6 million views as of late on July 5th.
The second reason Truth Social isn't needed is that the legal system just admonished the government for pressuring social media platforms to thwart free speech. A U.S. District Court Judge in Louisiana ruled the government is no longer permitted to contact social media companies regarding free speech matters, especially the DOJ, HHS, FBI and NIAID.
A third reason Truth Social is likely to struggle is that Meta Platforms $Meta Platforms, Inc.(META)$ just launched a competitor in Threads. The new Twitter rival app is now apparently live on the App Store and Google Play.
Meta has over 2 billion DAUs to push into the new short-posting text platform. While no one should expect a Twitter rival to be successful with the social media platform already entrenched with 300 million DAUs, the additional rival should crush any reason for Truth Social to succeed.
After nearly 16 months being active, Trump only has 5.7 million followers on Truth Social. He hasn't posted on Twitter since being banned ~18 months ago and still has 86.7 million followers while Musk now has 146.7 million followers on Twitter.
Source: Truth Social
Another sign of the ineffectiveness of Truth Social, Trump's last post on the platform only has 12.8K likes. His last post on Twitter got 641.2K likes all the way back on January 20, 2021.
Even Trump recently claimed the platform had reached record views in April, but Truth Social hasn't provided any recent user counts or financial data. Though, according to Similarweb, the user stats were still showing less than 400K daily users back in March. Monthly visits had eased back in the Summer around only 10 million.
Source: Similarweb
Now, Truth Social can always grow over time and eventually build a similar business as Twitter. Such an outcome appears unlikely with the prime reason to build an independent social media platform reduced by recent actions in the social media sector.
As highlighted in previous research, TMTG could end up with ~250 million shares outstanding and a cash balance of ~$1.1 billion. The market cap of $3.8 billion would be very aggressive for a business not gaining much traction and not reporting quarterly financials.
Takeaway
The key investor takeaway is that Digital World appears much closer to actually closing the business combination with TMTG. Unfortunately for shareholders, Truth Social hasn't managed to build a very valuable business over the last year and the SPAC is overpriced for the very competitive environment in the social media space now.
Investors should continue to sell the SPAC at prices above $10.
Source: Seeking Alpha
Comments