American Oriental Prices Convertible Notes

American Oriental Bioengineering (AOB) reported the pricing of its recently announced $115 million note offering. The Convertible Senior Notes due 2015 are being privately placed with a 5% coupon and a conversion price of $9.29, which constitutes a 15% premium to Tuesday night’s closing price of $8.08.

American Oriental reiterated its intention of using $30 million of the proceeds to repurchase its own shares. The goal of the repurchase is to counteract the dilutive effect of the note offering and blunt any decline in its stock price. American Oriental contracted with an affiliated party of the placement agent to accomplish the repurchase, and that affiliated party reserved the right to enter derivative transactions that could include shorting of American Oriental’s stock.

Outside of the stock repurchase, American Oriental will use the balance of the new capital for general corporate purposes, including possible acquisitions.

American Oriental has actively pursued M&A as a way of building up its business. In 2007, the company acquired Guangxi Boke Pharmaceutical for $40 million and Changchun Xinan Pharmaceutical Group for $30 million, both companies serving to increase AOB’s traditional Chinese medicine business. In 2008, the company paid $18 million to take a 38% share in China Aoxing (CAXG.OB), a company engaged in the highly regulated business of narcotic pain relief.

American Oriental reported cash of $159 million at the end of Q1, March 31, 2008. Figuring that its placement costs ran about $7 million and then taking away the $30 million earmarked for buybacks, the company will have about $237 million of cash after the financing.

Through some combination of the stock buyback/short unwinding and relief at seeing the actual terms of the deal, American Oriental rose 8%, climbing 62 cents to $8.70 following the announcement.

Disclosure: none.

Comments

[Nordic:]

This has got to be one of the dumbest things I have ever heard of - unless the point of it is to get cheap stock into the hands of some big buddy - or accomplise. If you sell a convertible, you are giving somebody a call on your stock because you think you can use the cash for some better purpose - to grow the company. If you use the proceeds to buy back stock you are subverting the point of the maneuvre and don't have that cash left. The 15% premium to the present price of the stock is extremely generous to some unknown buyer and I can't get the company to tell me who it is.
Disclosure: I have been an owner of this stock for some time, but this kind of thievery makes me want to sell as soon as I can see a tolerable opportunity.

2008 Jul 10 02:55 PM