Monday, November 21, 2011

Netflix Does Zero Coupon Convertible Bond Deal ($NFLX)

Netflix just announced a deal to sell $200 million aggregate principal amount of Zero Coupon Senior Convertible Notes due 2018. The Notes do not bear interest, and the initial conversion rate for the Notes is 11.6553 shares of stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $85.80 per share.

The way to think about this deal is that the buyer is loaning Netflix $200 million at no interest for seven years, and is receiving seven-year options (which are really valuable) struck at $85.80 to buy 2.33 million shares. If you assume that those options would sell for $30, they would be worth about $70 million.

Other significant terms:

The completion of the private placement of the Notes is contingent on satisfaction or waiver of customary conditions, as well as a requirement that the Company shall have raised at least $200 million in aggregate gross proceeds from the sale of its common stock to non-affiliated third-parties.

Upon the occurrence of a change of control, which will be defined in the Indenture, each holder of the Notes will have the right to require the Company to repurchase some or all of such holder's Notes at a purchase price in cash equal to 120% of the principal amount thereof.

The Indenture will include customary covenants for convertible notes. In addition, the Indenture will contain a covenant restricting the ability of the Company to pay cash dividends or to repurchase shares of its common stock, subject to certain exceptions.


Stagflationary Mark said...

How can you even think of Netflix on the day that will live in infamy?! ;)

CP said...

how many rubicons is this? you're supposed to update the count

Stagflationary Mark said...

It isn't technically a Rubicon until we cross over 1200.

We've had 29 crossings so far!

Although the odds seem good, I can't guarantee a 30th of course, lol. Sigh.

jd said...

if the author would be available for me to submit an inquiry ,it would be appreciated. this is an excellent article on the pricing of the conversion rate and the theoretical value of the embedded option on the 7 year note.the author estimates the option at $ 30. if it were possible to ascertain what calculations were used it would be most helpful .

nflx set the conversion rate at 85.90 ,a 12.5% premium when the stock was at 75 and the volatility was 76%. the pricing appears to be at a substantial discount to the theoretical value .

thank you