Ex, All Reg S means is that some of the securities are probably going to be sold abroad. This is not necessarily a garbage deal. The size of the deal, $350 million, makes it look more or less straightup to me. The Reg S deals you have to watch out for are from small floundering companies that raise, say, $25 million in offshore financing with a variable conversion ratio. These deals stink and almost always indicate a company in big trouble. The AOL deal, though not of the best quality, is much better than that. They probably want to sell some of it offshore in, for example, Asia, where a 4% dollar-denominated debt might look good compared to sliding local currency. The conversion feature works like an option, in this case a 5yr LEAP with a strike price about $104. That's a WAY out of the money option so the debentures have to be sold to someone willing to take 4%, well below current US corporate bond rates so that means look offshore. The more I look at this deal, the more I think AOL got caught a bit short of cash due to the expenses of network enhancement and needed a couple of bucks to tide them over. The potential dilution of the conversion feature is about 3.3%, say, 2-3/8 per share and got priced in at today's opening. The carry costs are obviously about $14 million less tax writeoff. AOL, of course, hopes that at sometime during the life of the converts the stock will be above the conversion price so they never have to repay the principal. Converts are usually issued near highs in the equity price, so that part is an open question. In any case, this is a valid means of financing--as long as they don't kept doing it until the company sinks from debt. AOL's a long way from that. The deal's not really worth heavy scrutiny.
Best,
Steve |
