NIHD: NII Holdings Using Stock to Buy Back Stock

Note: This article was submitted to the IBN Festival but has subsequently been updated. Please see the new article for a revised opinion.
Large Cap Watch List (Track at Marketocracy) member NII Holdings, Inc. (NIHD) announced its intention to sell approximately $1 billion principal amount of convertible notes due 2012. In addition, NII is expected to grant the initial purchaser a 13 day option to purchase up to an additional $200 million principal amount of the notes. NII intends to use a portion of the net proceeds from the notes offering to purchase up to 4 million shares of its common stock contemporaneously with the sale of the notes as part of a $500.0 million stock repurchase program authorized by its board on May 29, 2007.

I’ve commented in the past that I think these financing deals appear to benefit the bankers and buyers of the convertible notes more than they help shareholders. If the goal is to repurchase shares, why issue a security that can be exchanged for shares? What good is buying back shares if the company will then turn around and issue them again? Wouldn’t a straight bond do a better job of altering the capital structure?
For example, assuming NII can buy back 4 million shares at the current price, it would shell out $315 million of the proceeds from this financing. I haven’t seen the details, but I’d bet that that 4 million share number is about the number that these notes can eventually be converted into. If that is the case, the company is really only issuing $685-$885 million (depending on whether the overallotment is exercised) in equivalent non-convertible notes.

Rounding off to assume that 1/3 of the proceeds from the financing are designed to offset the imbedded option in the notes, investors can then extrapolate that stated rate into the implied interest rate being paid by multiplying the stated rate by 3/2. If that implied rate is higher than the rate the company could get by issuing a straight bond, it would seem that noteholders are getting a better deal than they otherwise would, courtesy of the shareholders.

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