Americas Structured Equity Issue

IFR Review of the Year 2012
4 min read
Stephen Lacey

Naming its price: Priceline captivated market participants on a six-year CB in March whose terms were so aggressive as to effectively serve as a straight-debt surrogate. For providing the market with a sense of direction and successfully arbitraging investment bank competition, Priceline’s US$1bn CB is IFR’s Americas Structured Equity Issue of the Year.

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The ability of Priceline, a notoriously shrewd company, to virtually name its own price on a US$1bn convertible bond in March was the type of iconic transaction that showed what was possible on terms and pricing. Against a backdrop of pent-up investor demand, the online travel broker managed to print a six-year unsecured CB with 50% a conversion premium paying a 1% coupon.

The aggressive terms – the conversion premium represented the highest achieved by on a vanilla CB in the US since 2003 – provided a template for similar transactions, including a US$525m five-year, 2.25% CB by Tibco Software in April that boasted a 52.5% conversion premium and a US$250m CB by Toll Brothers priced at 0.50%, up 50%.

“It was a watershed event for the convertible market this year,” said Bennett Schachter, a managing director in the Americas equity-linked origination group at sole bookrunner Goldman Sachs. “It broke the up 50% barrier that would facilitate similar deals for homebuilders as well as other sectors. We had a view that it was investment grade and that there was a shortage of paper in the market.”

With ruthless efficiency, Goldman trumped the competition by agreeing to buy a US$875m CB at 1%, up 50%, with an agreement by the company to repurchase US$200m worth of stock alongside the transaction. To the dismay of rivals, the bank was able to finalise pricing at 99.5, the top of a 98.5–99.5 marketing range, and subsequently exercise its US$125m over-allotment option.

Tellingly, the size of the share repurchase, designed to facilitate delta-hedging on the part of technical buyers, was decreased from US$200m to US$166m, reflecting the presence of long-only buyers in the bookbuild. Further evidence of outright participation was a 1.9% rise in the underlying stock the day after pricing of the overnight transaction.

Priceline, rated BBB by S&P, had contemplated a convertible bond since its previous CB two years earlier, conducting a series of competitive auctions only to shy away due to the focus on achieving a premium share price. Arguably, the company benefited from a process that provided feedback on where investment banks stood at multiple stages and led to increasingly aggressive terms.

“You have to give the guys at Goldman Sachs credit,” said one rival CB banker. “They absolutely nailed the terms.”

Others were critical of the issuer given the lengthy gestation period of the transaction and all of the work undertaken in securing approvals for such a sizeable commitment.

For Priceline the financing was truly opportunistic. The company sold a US$575m five-year CB in March 2010 and considered the possibility of a straight-debt placement, with pricing possible in the 4% range. The low-coupon, high-premium CB offered a similar profile, at lower all-in cash costs.

Priceline accomplished a number of goals from a corporate finance perspective. Although the company had sufficient liquidity, after finishing 2011 with US$2.7bn of cash and short-term investments, US$1.7bn of that was “trapped” offshore due to the tax obligations associated with repatriation. The CB provided liquidity in both the domestic and foreign markets.

Another accomplishment was the ability to lock-in the price of the repurchased stock, continuing its commitment to shareholders. The company purchasing stock at US$629.74, the reference, but dilution only kicking in above US$944.61 makes sense. That it was able to raise funds at an ultra-low rate of 1% is all the more impressive.

The additional liquidity would come in handy. In November, the company agreed to acquire Kayak Software for US$1.8bn, continuing a legacy of acquisitions that has helped it expand its business globally. The purchase, which is expected to close in the first quarter of 2013, will be funded with US$500m of cash and US$1.3bn in equity and assumed stock options.