Large Cap Watch List (Track at Marketocracy) member NII Holdings, Inc. (NIHD) announced financial results for the second quarter of 2007. For the second quarter, the Company added over 331,000 net subscribers, a new quarterly record and a 51% increase compared to net subscriber additions for the same period last year, resulting in an ending subscriber base of nearly 4.1 million subscribers. Operating revenues of $786 million, grew 41% over the same period last year and were ahead of the $762 million consensus estimate. Operating income of $134 million was a 20% increase over the prior year period, and net income of $84 million, or $0.52 per basic share, exceeded the $0.50 consensus.

The company also raised its guidance for the full year to $3.2 billion in revenue but the consensus was already there. Furthermore, given that any increased earnings are likely to be somewhat offset by increased capital expenditures, investors are selling the stock in a generally weak market.

Barely two weeks ago, when Large Cap Watch List (Track at Marketocracy) member NII Holdings (NIHD) announced they were offering a premium to entice bondholders to convert their notes into shares, I said they were paying dearly for what had originally looked like cheap financing. At the time, I provided the following analysis:

So now, three years later the company decides to close out the financing deal, and are willing to pay $80 per note as an inducement to convert the bond into shares early. To do so they will pay $28.2 million in cash for the interest and conversion premium, and issue stock worth $912.3 million - total consideration of $940.5 million for $300 million worth of notes when issued.

So how did the bondholders do on the “2 7/8%” notes? How does an annual return of more than 49% sound? And in hindsight, the convertible note offering looks too clever for its own good.

Well, it just got even more expensive:

NII Holdings, Inc. (Nasdaq: NIHD) announced today that it has increased the cash premium for its tender offer (the “Offer”), commenced on June 22, 2007, with respect to its 2 7/8% Convertible Notes due 2034 (the “Notes”) from $80.00 for each $1,000 principal amount of Notes to $85.00 for each $1,000 principal amount of Notes (the “Inducement Premium”) validly tendered and accepted for conversion into shares of the Company’s common stock pursuant to the terms of the Offer and the Notes.

Updating the analysis, they are now offering total compensation worth $989 million for the original $300 million worth of notes, and the lucky bondholders would earn an annualized return of more than 52%.

I have commented before that Large Cap Watch List (Track at Marketocracy) member NII Holdings (NIHD) appears better than others at negotiating financing deals that don’t favor one class of investors over another. But that doesn’t mean that its creative financing deals won’t end up being expensive:

NII Holdings, Inc. announced that it has commenced a tender offer with respect to its 2 7/8% Convertible Notes due 2034 in which it is offering to pay a cash inducement premium of $80.00, plus accrued and unpaid interest up to (but not including) the conversion date, for each $1,000 principal amount of Notes that are validly tendered and accepted for conversion into shares of the Company’s common stock pursuant to the terms of the Offer and the Notes.

The Notes are currently convertible into shares of the Company’s common stock at a conversion rate of 37.566 shares per $1,000 principal amount of the Notes. The outstanding Notes have an aggregate principal amount of $300,000,000 and are redeemable by the Company beginning on February 7, 2011. Assuming all of the outstanding Notes are tendered for conversion pursuant to the Offer, the Company’s total cash payment to the holders of the Notes, including the inducement premium and accrued and unpaid interest, would be approximately $28.2 million and would be funded from cash on hand. The total number of shares of the Company’s common stock issuable upon the conversion of all of the outstanding Notes would be approximately 11,269,800 shares. Based on the number of shares of the Company’s common stock outstanding on June 10, 2007, if all of the outstanding Notes are converted into shares of the Company’s common stock pursuant to the Offer, the number of outstanding shares of common stock would increase to approximately 163,157,450 shares. Full conversion of the Notes also would reduce the Company’s total consolidated debt by $300.0 million and annual interest expense attributable to the Notes of approximately $8.6 million would be eliminated.

The Notes were issued in January 2004, when NII’s stock was trading at a split-adjusted $15 per share. The $26.62 conversion price may have seemed distant, but over the 30-year life of the bond a 2% annual rise in the stock price would have left the conversion option in the money.

So now, three years later the company decides to close out the financing deal, and are willing to pay $80 per note as an inducement to convert the bond into shares early. To do so they will pay $28.2 million in cash for the interest and conversion premium, and issue stock worth $912.3 million - total consideration of $940.5 million for $300 million worth of notes when issued.

So how did the bondholders do on the “2 7/8%” notes? How does an annual return of more than 49% sound? And in hindsight, the convertible note offering looks too clever for its own good.

When Large Cap Watch List (Track at Marketocracy) member NII Holdings (NIHD) announced a convertible note offering my initial reaction was that it would probably benefit the bankers and noteholders more than the shareholders. Now that the details have been released, I think I spoke too soon.

NII Holdings, Inc. (Nasdaq: NIHD) today announced the pricing of its offering of $1,000.0 million principal amount of 3.125% Convertible Notes due 2012. The notes were privately placed with qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The sale of the notes is expected to close on June 5, 2007. NII has granted the initial purchaser of the notes a 13 day option to purchase up to an additional $200.0 million principal amount of notes.

The notes are convertible under certain circumstances into NII common stock at a conversion rate of 8.4517 shares per $1,000 principal amount of notes (equal to an initial conversion price of approximately $118.32 per share), subject to adjustment in certain circumstances. Upon a surrender of notes for conversion, NII will have the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and shares of its common stock.

That conversion rate means the stock will have to return an average of 7.85% annually for the conversion option to be in the money at expiration. Although shareholders are likely hoping for far higher returns than 7.85%, that rate does provide an acceptable hurdle. Compared to Xilinx’ (XLNX) offering, which paid a higher interest rate and a conversion price that required just 0.7% growth per year it seems downright stingy.

NII intends to use up to $250 million of the net proceeds from the notes offering to purchase 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.

At current prices, the $250 million buyback would soak up 3.1 million shares, but over time the notes can convert into at least 8.45 million shares (depending on whether the overallotment is exercised.) In order to buy back the full potential dilution of the bonds, the company would have to shell out $686 million of the proceeds. The remaining $314 million, along with the 3.125% paid on the entire principal, means the effective interest rate assuming a full offsetting buyback would be 9.95%. This, in effect, is a most-conservative way of looking at the issue. While a bit high (again, this is the most-conservative estimate), 9.95% doesn’t seem exorbitant for a company with NII’s credit rating.

All in all, it looks to me now like NII negotiated an agreement that is fair to both noteholders and shareholders.

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.

Large Cap Watch List (Track at Marketocracy) member NII Holdings, Inc. (NIHD) reported earnings:

NII Holdings, Inc. (Nasdaq: NIHD) today announced its consolidated financial results for the first quarter of 2007. For the first quarter, the Company added 289,000 net subscribers, a 47% increase compared to net subscriber additions for the same period last year, resulting in an ending subscriber base of over 3.7 million subscribers, an increase of 1 million subscribers over the 2.7 million base reported at the end of the first quarter 2006. Financial results for the first quarter of 2007 included record consolidated operating revenues of $714 million, a 35% increase over the same period last year. The Company reported record consolidated operating income before depreciation and amortization, or OIBDA, for the first quarter of $208 million, a 36% increase over the same period last year. The Company’s reported OIBDA includes approximately $9 million of non-cash stock option compensation expense as required by SFAS 123R, compared to $5 million of non-cash stock option compensation expense for the same period in 2006. The Company also reported consolidated operating income of $141 million, a 26% increase over the prior year period, and generated net income of $84 million, or $0.52 per basic share, for the first quarter.

Analysts were expecting the company to earn $0.48 per share on $700 million in revenues. Operating metrics were very strong: $58 in average revenue per user (ARPU) and just 1.6% in annualized churn. Despite the positive performance, however, management has maintained its guidance for full-year earnings and revenue but promised an update after the second quarter results if appropriate.

The current consensus estimate for the full year is $2.29 in EPS on $3.16 billion in revenue.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is: