Aus, first of all, the latest press release indicates $125 million convertibles at 4.5% interest rate and conversion to stock when the stock reaches a little over 18.
The advantages of this type of financial instrument are that the interest rate is lower than on a pure bond, where rates would probably be around 7 percent. The reason is that convertibility gives the bondholder some upward potential beyond the fixed income of the bond. The second advantage is that if the stock goes up, then what started out as debt turns into equity, giving the company a better ratio of assets to liabilities.
The disadvantages to existing shareholders are twofold. First, the interest obligation cuts into any profit that might accrue to the common shares. Second, as the bonds are converted into equity, you get earnings dilution. This could keep the price of the shares down, or put another way, could mean that the stock is not likely to exceed $20 per share for quite a while.
If SanDisk regains profitability as a result of a huge expansion in demand for removable flash memory, this convertible issue will be seen as a cheap way to raise cash. However, what concerns me is that SanDisk should NOT have been in need of such an infusion, given the extent of its manufacturing facilities. Something here doesn't look right.
Art |
