On NII Holdings' Convertible Note Offering: Spoke Too Soon

When Large Cap Watch List member NII Holdings (NIHD) announced a convertible note offering, my initial reaction was that it would probably benefit the bankers and noteholders more than the shareholders. Now that the details have been released, I think I spoke too soon.

NII Holdings, Inc. today announced the pricing of its offering of $1,000.0 million principal amount of 3.125% Convertible Notes due 2012. The notes were privately placed with qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The sale of the notes is expected to close on June 5, 2007. NII has granted the initial purchaser of the notes a 13 day option to purchase up to an additional $200.0 million principal amount of notes.

The notes are convertible under certain circumstances into NII common stock at a conversion rate of 8.4517 shares per $1,000 principal amount of notes (equal to an initial conversion price of approximately $118.32 per share), subject to adjustment in certain circumstances. Upon a surrender of notes for conversion, NII will have the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and shares of its common stock.

That conversion rate means the stock will have to return an average of 7.85% annually for the conversion option to be in the money at expiration. Although shareholders are likely hoping for far higher returns than 7.85%, that rate does provide an acceptable hurdle. Compared to Xilinx’ (XLNX) offering, which paid a higher interest rate and a conversion price that required just 0.7% growth per year it seems downright stingy.

NII intends to use up to $250 million of the net proceeds from the notes offering to purchase shares of its common stock contemporaneously with the sale of the notes as part of a $500.0 million stock repurchase program authorized by its board on May 29, 2007.

At current prices, the $250 million buyback would soak up 3.1 million shares, but over time the notes can convert into at least 8.45 million shares (depending on whether the overallotment is exercised). In order to buy back the full potential dilution of the bonds, the company would have to shell out $686 million of the proceeds. The remaining $314 million, along with the 3.125% paid on the entire principal, means the effective interest rate assuming a full offsetting buyback would be 9.95%. This, in effect, is a most-conservative way of looking at the issue. While a bit high (again, this is the most-conservative estimate), 9.95% doesn’t seem exorbitant for a company with NII’s credit rating.

All in all, it looks to me now like NII negotiated an agreement that is fair to both noteholders and shareholders.

NIHD 1-yr chart: