XLNX: Xilinx Joins the Dumb Financing Decision Parade

For some reason, the latest fashion appears to be issuing convertible notes. The practice allows companies to reduce the apparent share count, but assuming the share price rises (which stockholders are presumably rooting for) the shares willl just come right back. We’ve seen this with Ceradyne (CRDN) and Finisar (FNSR), and now Xilinx prices $900 mln 3.125 pct convertible debentures | Reuters.com:

Xilinx Inc. (XLNX) said it priced $900 million of 3.125 percent convertible junior subordinated debentures due in 2037, and expects the sale to close March 5.The debentures will initially be convertible into shares of Xilinx’s common stock at a conversion rate of 32.0760 shares of common stock per $1,000 principal amount of debentures, the company said.

At recent share prices, the company should be able to buy back between 32 and 33 million shares with the proceeds. If the company does well and the shares rise above $31.18 before 2037, the company will then exchange the bonds for approximately 29 million shares. So, for a net reduction of 3-4 million shares the company will be paying a 1.725% premium (the convertible yield less the dividend yield on the stock) for 30 years.

The additional interest expense relative to the dividends that would otherwise be paid amounts to $15.5 million per year. That would allow the company to buy 600,000 shares annually at the current price, which would give them the same net share reduction after just 5 or 6 years rather than the 30 year term of the convertible bonds.

Or alternatively, the company could buy back shares with the $300 million it used in the December quarter to increase its balance of short term investments. That would allow them to buy back 11.5 million shares and retire them permanently, never having to worry about the dilution again, and never incurring the interest payments on the debt. Over time, that would quadruple the net share buyback and they would recover more than 100% of the initial outlay in interest savings over the life of the convertible. If, for some reason, the company then failed to generate sufficient cash flow to run its operations (which appears to be an unlikely outcome) they could always then turn to the convertible securities market for a cash injection.
Of course, the company won’t have to reissue the shares if the stock does not rise above $31.18 by 2037. But we’re pretty sure shareholders aren’t interested in that potential outcome. No matter how you slice it it is hard to see how this deal is positive for existing shareholders.

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Topics: Ceradyne (CRDN), Finisar (FNSR), Stock Market, Xilinx (XLNX) | RSS

4 Comments on “XLNX: Xilinx Joins the Dumb Financing Decision Parade”

  1. William, the number one reason these convertible bond deals are done is specifically for the tax benefit. This latest one by Xilinx will have a tremendous tax benefit and thus be a great benefit to the shareholders.

  2. Trent

    Then I must be missing something – wouldn’t straight debt provide a larger tax benefit and result in a more permanent share retirement – or is the whole idea not to retire shares? Cause it looks to me like the deals are done specifically to temporarily reduce dilution caused by options.

  3. [...] So it would seem the company should be able to afford something more like $2 billion. But even that would cause cash to pile up further on the balance sheet, which already shows a $2.7 billion hoard against virtually no debt. And speaking of debt, maybe they should consider taking some on to recapitalize (use for share repurchases.) It seems like a reasonable value at 9x free cash flow, which by our reckoning values the company as though it will not grow – and the strong cash flow should be sufficient to support a reasonable amount of debt. [...]

  4. [...] So, in a one-two punch that almost seems designed solely to infuriate me, Micron is using complex convertible securities, which I consider to be financial sleight-of-hand, so they can keep funding the capex levels I already think are too high. Why can’t they take the hint that there are too many memory chips already, and cut their capex by $1.1 billion instead? For more information, see all articles on: Stock Market, MU This article is for entertainment purposes only and reflects the author’s opinion. It is not a solicitation or advice to buy or sell any securities mentioned. Always consult a qualified advisor before making investment decisions. [...]

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