This week, Yahoo announced that it was offering USD 1 billion in convertible bonds and buying back USD 5 billion of its own stock. Although the news focused on the share repurchase which is supposed to be funded by selling debt, Stephen Gandel questioned the rationale of the complicated deal in his report on Fortune. He asks, "Why not just announce a $4 billion share buyback, not add a billion dollars of debt, and call it a day?"
He said the transaction gets even more convoluted because Yahoo was selling a convertible bond which is not like a typical debt. It is essentially selling stock, even if the stock is not going to be immediately issued to investors. "Put it all together and here's what you get: Yahoo announced it was selling stock in order to raise money to buy stock, which seems pretty wacky," Gandel wrote.
Although he found the deal weird, the people in Wall Street that he talked to said the transaction seemed fair to both Yahoo and the investors. As proof, Yahoo was able to raise USD 1.25 billion for the bonds at a 0% interest rate.
Gandel said that convertible bond deals usually lead to a lowered stock price for a company. For as long as everything else is equal, a company that has more shares later on can expect to have a lowered price for the stock. A convertible issuance may also be a signal that the company's management has reason to believe that its stock will not be increasing any time soon.
Gandel said the stock buyback announcement served as a cover for the convertible bond offering aimed at protecting Yahoo's stock price from falling. It also wants to give the message that Yahoo stock is a good investment. Yet as far as the USD 5 billion buyback goes, Gandel said there is no assurance that it will spend all that money for the repurchase. It only authorized the buyback. He wrote, "Yahoo said it was using $200 million of the money it raised in the convertible deal to immediately buy shares. Will it end up using the remaining $4.8 billion? I don't know. But my guess is not anytime soon."
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