Thermo Fisher Scientific Inc. (TMO) is looking to put a lid on its pre-merger convertible debt.
The Waltham, Mass.-based manufacturer of laboratory and research instruments sold $750 million in new three- and five-year notes through a private placement with institutional buyers. Coinciding with the offering, the company launched a tender bid to buy back nearly $300 million in senior convertible notes dating back to before the 2006 merger between Thermo Electron Corp. and Fisher Scientific International Inc.
The proceeds will also be used to redeem $300 million in 10-year, 6.75-percent subordinated notes due in July 2014. The replacement debt sold last week included $350 million in three-year notes paying 2.15 percent in interest each year, along with notes maturing in 2014 and a 3.25 percent yield.
Fisher Scientific originally issued the 20-year convertibles in July 2003 as part of its $637 million acquisition of Perbio Science AB, a Swedish supplier of protein research products. They became Thermo Fisher’s responsibility three years later, when Thermo Electron agreed to take on $2.3 billion of Fisher’s debt after their merger closed in November 2006. The notes (or more accurately, debentures, because they mature longer than 10 years) yield 2.25 percent, costing Thermo Fisher about $6.7 million a year in interest expense, although it’s their convertible features that are more problematic for the company — especially as its stock price has again started to improve.
In addition to being on the hook for principal and interest, Thermo Fisher is now facing the prospect of having to pay note-holders the difference between the $23.75-per-share conversion price on the notes and the prevailing market price for the company’s stock. That works out to Thermo Fisher issuing about 5.85 million shares of new stock, or about $260 million in cash, to make good on the notes after Friday’s $44.60 closing price.
If the stock continues up to $50 a share, the bill climbs to either $330 million or 6.6 million new shares.
Pulling in those IOUs still won’t come cheap. At a minimum, Thermo Fisher will shell out $1,475.80 for each $1,000 of face value, or just under $436 million, if all of the convertible notes are tendered by the Dec. 17 deadline. That payout, however, is based on TMO stock selling for around $33.66 a share; if the stock next month remains near the Nov. 13 close, the total cost to the company would approach $575 million.
Thermo Fisher has two other series of pre-merger convertible notes: approximately $329 million in 20-year, 3.25-percent senior subordinated notes exercisable at 40.20 per share and about $345 million in 30-year, floating rate debentures with an $29.55 exercise price. Those notes come due in 2024 and 2033, respectively.
At current prices, note-holders could cash in all of those the convertible securities and get nearly 10 million shares of stock on top of the principal and accrued interest due. That would eat through most of Thermo Fisher’s available cash and shorter-term borrowing capacity, although the company appears to be more concerned with the extra stock entering the market and diluting current shareholder positions.
New accounting rules that took effect in January also increased the cost of carrying convertible notes by requiring companies to record the potential payout on convertible debt as a non-cash expense. The provisions shaved about a penny off Thermo Fisher’s earnings-per-share during the third quarter and will further impact future results, now that all of the company’s convertible debt has passed its respective trigger prices.
Thermo Fisher has been fairly aggressive this year in buying back stock, paying $416.2 million through Sept. 30. Company officials likewise have been cognizant of the convertible notes, currently comprising nearly half of its $2 billion in long-term debt.
In its 2008 annual report (PDF), the company said that while investors typically hold on to the notes until shortly before their maturity date, they are more apt to cash in during volatile market conditions, especially if they “perceive the market for the debentures to be weaker than the market for the common stock.”