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I have commented before that Large Cap Watch List member NII Holdings (NASDAQ:NIHD) appears better than others at negotiating financing deals that don’t favor one class of investors over another. But that doesn’t mean that its creative financing deals won’t end up being expensive:

NII Holdings, Inc. announced that it has commenced a tender offer with respect to its 2 7/8% Convertible Notes due 2034 in which it is offering to pay a cash inducement premium of $80.00, plus accrued and unpaid interest up to (but not including) the conversion date, for each $1,000 principal amount of Notes that are validly tendered and accepted for conversion into shares of the Company’s common stock pursuant to the terms of the Offer and the Notes.

The Notes are currently convertible into shares of the Company’s common stock at a conversion rate of 37.566 shares per $1,000 principal amount of the Notes. The outstanding Notes have an aggregate principal amount of $300,000,000 and are redeemable by the Company beginning on February 7, 2011. Assuming all of the outstanding Notes are tendered for conversion pursuant to the Offer, the Company’s total cash payment to the holders of the Notes, including the inducement premium and accrued and unpaid interest, would be approximately $28.2 million and would be funded from cash on hand. The total number of shares of the Company’s common stock issuable upon the conversion of all of the outstanding Notes would be approximately 11,269,800 shares. Based on the number of shares of the Company’s common stock outstanding on June 10, 2007, if all of the outstanding Notes are converted into shares of the Company’s common stock pursuant to the Offer, the number of outstanding shares of common stock would increase to approximately 163,157,450 shares. Full conversion of the Notes also would reduce the Company’s total consolidated debt by $300.0 million and annual interest expense attributable to the Notes of approximately $8.6 million would be eliminated.

The Notes were issued in January 2004, when NII’s stock was trading at a split-adjusted $15 per share. The $26.62 conversion price may have seemed distant, but over the 30-year life of the bond a 2% annual rise in the stock price would have left the conversion option in the money.

So now, three years later the company decides to close out the financing deal, and is willing to pay $80 per note as an inducement to convert the bond into shares early. To do so they will pay $28.2 million in cash for the interest and conversion premium, and issue stock worth $912.3 million - total consideration of $940.5 million for $300 million worth of notes when issued.

So how did the bondholders do on the “2 7/8%” notes? How does an annual return of more than 49% sound? In hindsight, the convertible note offering looks to have been too clever for its own good.

NIHD 1-yr chart:

nihd

Source: NII Holdings' Cheap Financing Ends Up Costing a Pretty Penny