AMD Announces Seasoned Issue Worth $600 Million in Shares and $450 Million of Convertible Senior Notes

Usman Pirzada
Posted Sep 7, 2016
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An announcement by AMD (NASDAQ: AMD) has revealed that the company intends to do a Follow-On Public Offering with shares worth $600 Million as well as issue convertible senior notes worth $450 Million and maturing in 2026. According to the company the net proceeds of $1,020 Million will be used to pay off debt including but not limited to repaying its borrowings and repurchasing outstanding senior notes (the newly issued notes will be referred to as the “new notes”). It goes without saying that this is a very interesting move by AMD and will undoubtedly affect both the company as well as its shareholders.

AMD (NASDAQ: AMD) to receive net proceeds of $1,020 Million; will be used to pay off debt

Since we are dealing with a seasoned issue here of roughly $600 Million – we are looking at roughly 85.7 Million new shares to be minted at current price levels. However, given that this is a shelf registration, the firm has up to 2 years to conduct the actual offering. Of course, if the company decides to issue rights then this value will probably be a bit bigger since those will be issued at a discount to current market price at time of issue and will therefore require more shares to be issued for there to be proceeds worth $600 Million unless AMD continues its stellar recent run and continues to make gains prior to the offering. In any case, AMD stock owners are looking at an ownership dilution of roughly 10% to 13% provided they don’t subscribe to rights. Before we go any further here is the relevant notice from AMD:

AMD (NASDAQ: AMD) today announced that it intends to commence concurrent public offerings, subject to market and other conditions, of approximately $600 million of its common stock (the “Shares”) and $450 million aggregate principal amount of its convertible senior notes due 2026 (the “New Notes”). AMD is offering all of the Shares and the New Notes. In addition, AMD expects to grant the underwriters a 30-day option to purchase up to approximately $90 million of additional shares of common stock at the public offering price and up to $67.5 million principal amount of additional convertible senior notes.

AMD intends to use net proceeds of $1,020 million received from the offerings to repay its borrowings under its credit facility and/or to purchase its outstanding senior notes. After the completion of a tender offer for its outstanding senior notes, AMD has the option, but not the obligation, to call any and all of the untendered 7.75 percent Senior Notes due 2020 with any remaining net proceeds. AMD will use any remaining net proceeds for capital expenditures, working capital and other general corporate purposes.

The market has already started reacting to this information and pre-market levels of the stock are currently sustaining at just over the $7 mark – which happens to be a support level. The current sentiment however, appears to be one of guarded observation though as the share price hasn’t actually corrected completely to account for a 10% dilution of ownership (which would be at roughly the $6.6 mark). This is probably because the market is perceiving the cash injection to be something good for the profitability of AMD in the long run since it can reduce its debt burden significantly without having to roll all of the current notes forward.

There is also the question of why the company has announced an FPO now, because it doesn’t make much sense from a strategic perspective. If AMD’s share price goes up after the launch of Zen – an FPO will be able to recoup much more value from the market than one that is done before the fact. Effectively, AMD is missing out on a much larger cash injection by doing the FPO pre-maturely. We have asked for a prospectus and will let you guys know when we get hard details of the offering date. So what could have prompted AMD to suddenly take corporate action to raise capital to payback debt? Debt that isn’t close to maturing I might add.

Although it is stated that the proceeds will be used to pay off debt it, is worth mentioning here that how AMD (NASDAQ: AMD) uses this cash is completely up to the company, and it is not completely bound by law to do what it has stated in the notice. FPO (Follow On Public Offerings)s like this one are usually regarded with guarded sentiment because while the cash injection certainly increases the chances of a company’s future profitability and growth – it also means that the company was in need of cash – something that raises eyebrows considering how close AMD is to the Zen launch.

There are a couple of possibilities that would explain why ‘now’ and I would like to go over them briefly: Either AMD was in desperate need of cash which would explain why it made the seasoned offering prematurely; since if Zen does not work out well – leaving money on the table from an FPO will be the least of its concerns. Alternatively, it might have made this move as an insurance policy to make sure Zen succeeds. The chipmaker needs to ship Zen in large volumes for it to be the figurative golden hen and this cash injection could ensure that any problems (such as issues related to GlobalFoundries) are promptly remedied.

Conclusion: Either way you spin the bottle, and disregarding the fact whether AMD (NASDAQ: AMD) was in a bad place before the announcement, the fact remains that this cash injection can only be taken as a good thing for the company in the long run. Unless the management drops the ball on this opportunity as well – the chances of Zen being a success increase ever so slightly with this announcement.

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