the strange-but-true convertible issued by Priceline (PCLN)

the PLCN convertible note

I read about this the other day in the Financial Times.

On May 30th, PCLN filed an 8-K with the SEC in which it outlined the terms of a $1 billion convertible note it sold as a private placement under Rule 144a (meaning to sophisticated investors, i.e., people with at least $100 million under management).

The complete terms aren’t available, but the broad strokes are that it’s:

–a seven-year note

yielding 0.35% per year (just for reference, the seven-year Treasury note yielded 1.5% when the deal was struck and 2.2% now)

–each $1000 note convertible into 0.7608 PCLN shares.  Conversion parity (the price at which the holder doesn’t lose money by converting) is therefore $1315.  That’s  a 66% premium to PCLN’s price at the time of issue.

a sweet deal for PCLN

The company is using the proceeds, $979 million after fees, to buy back its own stock.  It will cost around $600 million for PCLN to retire the shares needed to redeem the convertible.  The rest is gravy.   That’s assuming, of course, that PCLN’s stock can rise above conversion parity at some point between, say, 2015 and 2020, depending on the exact terms of the note agreement.  If it does, PCLN will presumably call the note, forcing conversion.

The only worry for PCLN is that under unfavorable conditions it might have to pay the money back.  But it can hedge that risk if it wants.

Who would buy this thing?

The conversion premium, 66%, is about twice what I’d consider normal.

If we look at the issue in an admittedly old-fashioned way, it would take just over 188 years of collecting interest at the 0.35% rate to recover the conversion premium.

Q:  If you were that enthusiastic about PCLN, why not just buy the stock at 60% (!!) of what the convert would cost?

A:  because you can’t.

Two classes of buyers:

convertible funds, which generally can’t hold straight stocks.  Many times, the difference between winners and losers among convertible fund managers comes down to how they handle new issues.  It will likely be impossible to build a position in the aftermarket, so managers may figure the safer course is to guard against the possibility that PCLN spikes upward by participating in the issue.

bond managers, whose contracts with clients prohibit them from buying stocks.  Their thought process probably goes something like this:

As the Fed normalizes interest rates, all fixed income is going to decline in price.  The PCLN convert is a seven-year instrument so that feature won’t cause it to decline by much.  If some academic model (a wacky one, in my view) can show that the option value of the conversion feature makes the note worth $1,000 today, that should be another reason not to mark down the price.  Maybe PCLN’s rocketship ride can continue–maybe even to the point that it exceeds conversion value.  HOME RUN!!!

No matter what happens, other than a PCLN visit to Chapter 11, the PLCN convert has got to be better than a straight bond.

my take

Shows what a weird world Wall Street lives in today.

2 responses

    • Thanks. Whoever the brokers for the PCLN deal were, they made $21 million in fees for what was probably only a couple of days’ work. What I personally find amazing is that they always seem to find someone to buy whatever they happen to be selling at the moment. Liars Poker is really instructive here.

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