Robert, you made a little mistake, I believe, the $800 MM will convert (sometime during the next 30 years) to 10.48 MM shares (800/76.36).However, th book value (assumin full conversion) increases from a current $12.38 (without last quarter additions) to $16.76, that i an immediate increase of 35% in NVLS book value. Of course cash will also increase by 66%.
Why make the deal, gee, why not, anytime you can sell shares above market (a very nice premium of 50% and above the all time high of NVLS), and at a fat multiple to book, the company is doing quite fine. Mind yo, this converts carries no interest. Who are the fools that are buying this instrument, and why, is beyond my comprehension.
I have thought hard about it, and I think that the only reason this deal is going through, is because Wall Street needs the $40 MM or so in commissions. They simply are swindling some institutional investors into buying this paper. NVLS is very smart accepting this deal, there is absolutely no downside in this deal for NVLS, whatever they decide to do with the money. Just a master piece of "collusion" between starving deal makers and a smart company telling them, we really do not need cash, but if you want to issue additional stock at 50% premium to market, we do not mind carrying this interest free debt on our book for, 5, 10 or even 30 years.
Look at it this way, they do nothing with that money but leave it in treasuries at let say just 5.5%, that will result in a pretax profits per year of $44 MM. I would love to take that deal myself if anyone offered it. Since NVLS' return on assets is closer to 13.5%, one can expect the pretax profits increase to average $100 MM per year. After taxes, this is almost $.50 per share. This deb is not dilutive, it is accretive at once. A masterpiece of financial engineering.
My general conclusion is that there is a lot of money out there desperately looking for a home (with some "security") that this money was willing to accept such a lousy deal (for the new debt holders) on the hope that the long term (over 30 years) returns, will exceed 5.5% through stock appreciation. Frankly, with such a high tech company, this is a mammoth risk to take. After all, NVLS' success is its management, and who knows what management will be at the helm a short 10 years down the road. The fact that this deal is going through, is just another proof that NVLS' current management is really "top notch".
Zeev |
