NT got the cash, but at what price?
What a sweet steal for the hedges... Note the conversion price...
Thursday June 6, 11:36 pm Eastern Time
Reuters Business Report
Nortel Raises $1.49 Billion
By Susan Taylor and Jonathan Stempel
OTTAWA/NEW YORK (Reuters) - Needing cash to help it through a big slump in demand for telecommunications equipment, Nortel Networks Corp. on Thursday raised $1.49 billion, nearly double what it had planned, from common stock and convertible securities offerings, sources familiar with the matter said.
Nortel planned to raise about $800 million but boosted the offerings by 86 percent, the sources said, though its shares have sunk to just US$1.41, a 19-year low, and have fallen 89 percent in the last year.
The shares are down 32 percent since Nortel set plans for the offerings on Monday, in part because the offerings dilute existing Nortel shares, which some investors sold "short."
"The only thing worse than diluting your shareholders and showing that you're in a bit of a desperation financing mode is to not do it -- and run out of money," said Glenn Reynolds, an analyst at CreditSights Inc. a fixed-income research service in New York. He spoke before Nortel boosted the offerings.
Nortel said on Monday it planned to use proceeds from the offerings for general corporate purposes.
Shares of Brampton, Ontario-based Nortel (NYSE:NT - News; Toronto:NT.TO - News) fell 19 cents, or 11.9 percent, on the New York Stock Exchange on Thursday. They fell another 7 cents in after-hours trading.
The shares closed Thursday on the Toronto Stock Exchange at C$2.22, down 25 cents. Thursday trading volume topped 200 million shares in New York and 86 million in Toronto.
SALE TERMS
Nortel raised US$776 million by offering 550 million shares, up from an original 150 million, at $1.41 each, people familiar with the matter said.
A portfolio manager, who asked not to be identified, speculated that hedge funds sold so many Nortel shares short that the company issued more shares to cover the shorts.
Nortel also raised US$714 million by selling securities automatically convertible into Nortel shares in three years, the people familiar said. These carried a 7 percent dividend, which is collateralized by U.S. Treasury strips, and are convertible into Nortel shares at US$1.69, which is 20 percent above the Thursday closing price. A 7 percent to 7.5 percent dividend and 18 percent to 22 percent premium were expected.
Nortel last August sold $1.8 billion of convertible senior notes with a 4.25 percent coupon and 32.3 percent premium. These have since fallen 49 percent, traders said.
"Companies like this are scared in the face of weak business conditions, and trying to build huge liquidity cushions," said F. Barry Nelson, who helps invest $1.25 billion of convertible securities for Advent Capital Management in New York and did not plan to buy Nortel's securities.
The fortunes of Nortel, which lost $27.3 billion in 2001 and whose credit ratings later fell to "junk" status, are tied to a rebound in demand for phone, wireless and Internet network equipment that analysts don't expect before 2003 or 2004.
"No one's really calling a bottom anymore," said Joanna Makris, an analyst at Adams, Harkness & Hill in Boston.
Saddled with $4.8 billion of debt, Nortel is slashing staff by more than half to 42,000. Its first quarter sales fell 49 percent to $2.91 billion from a year ago. Nortel said it can break even in the fourth quarter on $3.2 billion of revenue.
NEW GROUND
Because Nortel shares fell so much this week, the company ended up in position to issue more shares than it may have planned. The company had about 3.2 billion shares before the offerings, a securities filing shows.
"You want a flat market or you want a rising market" when issuing equity or equity-linked securities, said John Kinsey, portfolio manager at Caldwell Securities in Toronto, which owns Nortel shares. "In a down market, this is very dangerous."
CreditSights' Reynolds said Nortel's low share price may have broken new ground for a company conducting big equity-linked offerings. When Nortel rival Lucent Technologies Inc. (NYSE:LU - News) sold $1.75 billion of convertibles in March, its shares were at US$4.92.
"They should have done this six months ago, or three months ago," said Reynolds. "They were hoping the market would turn and stabilize. It's unfortunate it was the wrong market call."
Reynolds said Nortel's cash pools would dry up without the offerings, and that the company would otherwise violate bank covenants, barring it from drawing on credit lines.
Credit Suisse First Boston and RBC Capital Markets arranged the equity offering. Credit Suisse, J.P. Morgan and Salomon Smith Barney arranged the convertible offering. |
