Brocade Communications Systems Inc. (NASDAQ: BRCD) announced that it intends to offer up to $500 million principal amount of convertible senior notes due in 2020. The company expects to offer the initial purchasers an overallotment option to purchase up to an additional $75 million principal amount of notes.
The notes will be unsecured, senior obligations of Brocade, and interest will be payable semi-annually in arrears. Before the close of business on the business day immediately preceding September 1, 2019, the notes will become convertible. On the trading day immediately preceding maturity on January 1, 2020, the notes will cease to be convertible at the end of the business day.
Brocade expects to enter into privately negotiated convertible note hedge transactions with some initial purchasers, including their affiliates or other financial institutions. These convertible note hedge transactions are being conducted to reduce the potential dilution to Brocade’s common stock upon any conversion of notes. This will potentially offset the cash payments Brocade may make in excess of the principal amount. All this is being done in the event that the market price of Brocade’s common stock is greater at that time than the strike price of those convertible note hedge transactions.
Brocade said that it also plans to use the net proceeds to pay down the cost of the convertible note hedge transactions. Other uses include using up to $100 million of the net proceeds to repurchase shares of its common stock. The remainder of the proceeds would be used to redeem all of Brocade’s outstanding 6.875% senior secured notes due 2020 and for general corporate purposes. With the closing of the offering, Brocade will terminate its senior credit facility.
These offerings with hedging transactions can create confusion sometimes among investors. That being said, the company’s $4.9 billion market cap should help to put this in perspective — and not a bad perspective for that matter.
Shares of Brocade closed Wednesday up 0.8% at $11.41. The stock has a consensus analyst price target of $11.33 and a 52-week trading range of $7.95 to $12.07.