Update: Seadrill Announces (Another) Voluntary Bond Conversion

Jul.18.14 | About: Seadrill Limited (SDRL)


Seadrill announces new voluntary bond conversion after pulling similar offer on July 9.

The flip-flop by management is concerning and perhaps overly solicitous to a small group of stakeholders.

Less optimistic on Seadrill relative to peer group than 10 days ago.

This morning, July 18, Seadrill (NYSE:SDRL) announced a new voluntary incentive offering to convert its $650 million 2017 bond, which pays 3.375%, into Company shares (under a pre-determined conversion schedule) with a sweetener of an additional cash payment of $11,840 per $100,000 of bonds. Over 60% of bondholders have pre-committed to the conversion. What makes this announcement especially noteworthy, is on July 8, SDRL announced a similar plan (the cash inducement was only $10,645 under that plan) for the conversion of the same bonds in conjunction with an attractively priced $1 billion convertible bond offering. The market reacted negatively to the announcement and the Company pulled the deal the next day (July 9). On July 10, SDRL announced a $1.35 billion financing at attractive rates (LIBOR + 200 bp), effectively demonstrating its ability to raise funds at low rates while increasing its cash balances.

In my article on July 8, "Seadrill: Market Overreacts To Nicely-Priced Debt Offering", it was noted that the market reaction to the offering appeared to be overly negative. SDRL's activity over the next 10 days has been highly unusual and atypical of large, well-managed corporations. The initial reaction of the Board, to pull the offering following the market reaction and then very quickly announce alternate financing was a nice example of market responsiveness and nimble action. Today's re-introduction of the same (slightly worse from an investor perspective) deal makes the company seem indecisive, and perhaps overly sensitive to a small group of stakeholders; the SDRL press-release specifically mentions Board concern for the negative impact to a small group of bondholders.

While, for macro, geo-political factors, I am optimistic about SDRL and the sector, the way this offering has played out has negatively impacted my opinion of the board and management. Relative to the sector, I am less bullish on SDRL than prior to the conversion/financing debacle (if this was ever turned into a business school case, I can't imagine in the quantum it would be viewed as anything but a debacle).

Disclosure: The author is long SDRL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.