>>As far as I can understand these are very favorable terms.>>
Or maybe not. Or maybe. The terms are great, but the market doesn't like to see Cephalon behave in this way. The market didn't seem to appreciate the news anyhow. We have a couple of different aspects to consider here.
1. The new deal will increase the debt on the balance sheet with between 425 mUSD and 575 mUSD. This is not welcome as they already were carrying 838 mUSD worth of debt on the balance sheet (664 mUSD after deduction for what will be repaid). Now they will go over a billion. That is a lot.
2. They are pushing out the maturities somewhat. They are replacing 174 mUSD falling due in May 2006 with 300-375 mUSD falling due 2008 and an amount in the same range becoming puttable in 2010. Not enough to make anyone happy.
3. They are saving a little bit on the interest bill. As the new bonds are for all practical purposes running with a zero coupon they save about 9 mUSD per year during the remaining three years of life for the 400 mUSd bond issue. They will have to pay a little bit over the face value when calling the 174 millions. Abt 5,5 mUSD. Positive, but not enough to make a difference.
4. There will be further dilution. The 174 mUSD repurchased could be converted at a share price of USD 74. The new bonds at USD 59,50 and USD 56,50 resp. Although some financial wizardry reduces the dilutive effect so it comes out at USD 72.08 according to the company. The effective additional dilution will therefore come from the increase in the debt amounts and not from the conversion terms. It is positive that the price for the conversion comes down (from the bond holders point of view) as it will increase the chance of conversion taking place. Cephalon has by far too much debt on the balance sheet.
The main concern going forward (apart from the normal stuff like sales, research, product development and the like) will in my book be the debt. It is not good to have it on the balance sheet and it will hurt current share holders to have it converted through the dilution of their ownership of the company.
According to Yahoo (who are not always 100 % correct) the company now has 55,5 million shares outstanding giving a market cap of 2,6 billion dollars.
If all debt is converted the number of shares will be increased as follows:
600 mUSD issue due in Dec. 2006 may be converted at 81 USD. Will give 7,4m new shares.
55 mUSD issue due in March 2007 may be converted at USD 70,36. Will give 0.8m new shares.
300-375 mUSD issue due 2008 may (from the shareholders point of view) be converted at USD 72.08. Will give 4,2 - 5,2 m new shares.
300-375 mUSD issue due 2010 may (from the shareholders point of view) be converted at USD 72.08. Will give 4,2 - 5,2 m new shares.
A large number of shares. If everything is converted the number of shares will increase from 55,5m to 72 - 74 million shares. An increase by around a third.
Evidently the rather sour reaction to the new bond issue is due to the fact that the either/or combination of more debt and more stock is not very popular among shareholders.
With around 550 mUSD of cash and investments on the left side of the balance sheet, it is also not immediately clear what the purpose of the additional 425 - 575 mUSD (less hedging costs), that they have now raised, will be.
As they are already at least cash-flow neutral on an operative bases the only valid assumption I can make is that they are planning another acquisition.
Erik |
