UIC: To Convert (United Industrial Bonds) or Not to Convert?
Mid Cap Watch List (Track at Marketocracy) member United Industrial Corp. (UIC) has announced that bondholders have the option to convert bonds into shares if they so choose.
United Industrial Corporation announced today that holders of the 3.75% Convertible Senior Notes due 2024 (”Senior Notes”) can convert their Senior Notes into shares of UIC common stock during the next calendar quarter from April 1, 2007 through June 30, 2007.
A holder electing to convert Senior Notes will receive either cash or 25.4863 shares of UIC common stock (or a combination of cash and common stock) per $1,000 principal amount of Senior Notes. Conversion is at the option of the holder. Payment in cash and/or UIC common stock is at the option of UIC.
Since the shares closed at $55.05, the conversion option is currently worth $1,403 for every $1,000 in bond face value. So, should the bondholders convert? It depends. United Industrial notes:
If the Senior Notes are converted into common stock, holders will forfeit their right to receive 3.75% annual interest on the Senior Notes and will instead be entitled to receive future dividends (if any) on UIC common stock. Such dividends are currently $0.40 per share per year, equivalent to an annual dividend yield of 0.72% based on the closing stock price on March 30, 2007.
So by converting now, you would give up more than 3% per yer in interest payments relative to the dividend (although the dividend likely enjoys a lower tax rate.) Furthermore, you don’t lose the option to convert at a later date, although the right to convert could temporarily be suspended if the stock price falls. But on the other hand, you would get hurt if you converted and the stock fell, too.
The bottom line: the bond has a higher yield, less downside and nearly equal upside to the stock. We would say no to conversion. If you want to take some profits, sell the bond (with conversion premium intact) to another bondholder instead.
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