ON Semi Sells $440 Million of Converts As Shares Continue To Roll

Looks who was topping the Nasdaq Most Active List today: my old friend ON Semiconductor (ONNN). The stock shot up on huge volume late last week, apparently in anticipation that the company was going to make some changes in its capital structure. And so it has: the company today priced $440 million of 2.625% convertible senior subordinated notes due 2026. The transaction is expected to close Friday. The purchasers have been granted the right to buy up to another $4 million of the notes.

Yesterday, the company had announced a plan to $400 million of convertible notes; the actual amount is higher than originally stated. ON still intends to use $199.1 million of the proceeds to pay down its senior secured credit facility; that will bring the total outstanding to $200 million. As ON said yesterday, it still plans to buy back $230 million of common stock, or about 30.7 million shares based on Monday’s closing stock price. As I reported yesterday, it seems obvious that the shares, which are to be handled in privately negotiated transactions, will be repurchased from Texas Pacific Group, the company’s largest shareholder.

The notes can be converted to common at $10.50, about a 40% conversion premium. ON will have the right to redeem the notes after 2013. The notes were sold under Rule 144A, and aren’t registered.

On the news, ON Semi shares are up another 21 cents at $7.71 on more than 74 million shares. I would venture to guess that this is the heaviest trading in the stock, well, ever. The company has 325 million shares outstanding; Yahoo Finance shows that the float is 152 million shares. Total volume over the last five sessions: more than 144 million shares.

Now, no doubt that the debt restructuring has put the company on a better footing financially. But the volume is pretty unusual. Potentially, some of it represents convertible note buyers taking short positions to hedge their bonds; some of it could be related to the company’s stock repurchase, or other trading by Texas Pacific, which as of a filing with the SEC yesterday had a 32.3% stake in the company.

Mark Edelstone, an analyst with Morgan Stanley, this morning raised his earnings estimates for the company, for mathematical reasons: less interest to pay, and fewer shares outstanding; he kept his rating at Equal Weight.

Craig Berger, an analyst with Wedbush Morgan, says that the overhang on the stock from the large TPG stake is “thinning” as the company buys back some of the shares. In his comments today, he repeats something he told me in an interview a couple of days ago: that chip stocks in which TPG has had a big stake tend to appreciate “meaningfully” once the firm’s controlling stake drops to 20%. If the whole buyback were devoted to TPG shares, their stake would drop to 23%.

Berger says ON is “one of the more compelling lower tier analog/discrete stocks given relatively strong execution, healthy channel inventory levels, a thinning TPG overhand and a very low 9-10x forward P/E multiple.” He rate the stock a Buy, with a $10 price target.

The one thing that bothers me a little bit is that this all started with a surge of trading in the stock last Wednesday afternoon. Why did that happen? Did someone know about the coming restructuring? Were they supposed to know? Maybe someone did some logical deduction; the company had asked its lenders for permission to sell more debt to restructure, and had said it would buyback stock if the lenders would allow them to do so. So this isn’t entirely unexpected. And yet…I still think there’s a missing piece to this story.

Shares were up 4.27% today on more than 15 times their normal volume to close at $7.82.

ONNN 1-yr chart:

Comments

[oldcurmudgeon2:]

Most likely the convertible arbitrage hedge funds were setting up their shorts prior to the deal coming. You don't sell a deal with no notice -- I mean, you've got to do some due dililgence -- so these guys have to know about it before it comes.

2006 Dec 13 10:59 AM