I have been thinking about the potential effect of the convertible debt for a while. I haven't seen any analysis of it here recently, although it was probably done by someone back in 1997 when the offering was done. Now that we're approaching the strike price, I thought I would post the following to generate some discussion regarding the possible dilution, etc. of the issue.
From Cymer's Oct. 1997 S-8:
"The Notes are convertible at the option of the holder into shares of
Common Stock of the Company (at any time on or after November 5, 1997 and prior to redemption or maturity, at a conversion rate of 21.2766 shares per $1,000 principal amount of Notes), subject to adjustment under certain circumstances."
Two things of importance: (1) notes are convertible at the option of the holders, not the company, and (2) the conversion rate of 21.2766 shares per $1000 give a conversion price of $46.99.
Considering that CYMI issued $172,500,000 in debt, my back-of-the-envelope math indicates that 3,670,213.5 shares may be added to the float ([$172,500,000/1000] * 21.2766).
Potential Dilution:
In the first place, I'm not sure that the current figures regarding average shares outstanding don't already include these 3.67 MM shares because they are exercisable at any time, even though to do at less than $47 would not be a wise move financially.
Assuming that the shares are not currently included in the EPS numbers, there would be some dilution. According to my notes, the last earnings report indicated that 28,046,000 shares were outstanding on a diluted basis. Adding these 3.67 million shares to the float gives us 31,716,214 shares.
That would give us about 13% dilution (3.67 MM / 28 MM). This would turn $2.00 EPS FY 2000 into about $1.77. It would turn the analyst's estimates of $1.33 into about $1.18, assuming that these analyst estimates don't already assume dilution from the convertible. In short, assuming the same PE multiple would otherwise apply, the shares would be worth 13% less. On the other hand, CYMI gets to retire $172.5 MM in debt and doesn't need to worry about interest payments (but which I think are at a sweetheart level of about 3.5%).
Overhead Supply: Even though we are nearing the all-time high, these 3.67 MM convertible shares represent some potential overhead supply at about $47. This is about 3 weeks worth of trading supply, assuming 250K shares trade a day, which takes into account the fact that the NAZ counts each trade twice, so the normal volume of ~500K a day really means 250K shares traded hands. Along with normal selling pressures that follow a quick run from 32 to 44, as well as the all-time high of 49, I wouldn't be surprised to see the price stall in the mid-to-high 40s for several weeks, or even months. Once we punch through that, however, it's a free ride up. I'm holding for that free ride.
As always, JMHO. Trade at your own risk.
RK |
