Between August 18th and August 24th, the management team at Sabre initiated a series of changes aimed at improving the company’s chances of survival long term. These changes will ultimately come at the expense of shareholders, but with as much debt as the company currently has, it’s unlikely there were other options available to the firm. The first step worth mentioning here is a common stock offering. Management ended up issuing 35.71 million shares of common stock at a price of $7 per unit. This will result in $250 million of gross proceeds, with net proceeds estimated to total $239.38 million.
In addition to these shares, management has provided underwriters with the option to buy a further 5.36 million units at the same price. This should result in a further $50 million in gross proceeds, bringing total net proceeds from the raise up to $287.50 million. If shares were still up around $20 per unit, this size of a raise would have cost investors just 5.2% of the business. But with shares priced at $7 a piece, the cost nearly triples to 13%. That alone is a costly move for the firm.
If you thought that dilution stopped here, think again. Management has also announced plans to issue Mandatory Convertible Preferred Stock to investors. Initially, the goal was to make this amount $250 million with an underwriter’s option of $50 million for gross proceeds of up to $300 million and net proceeds of up to $287.50 million just like with the common units offering. However, management has since upsized these units. In all, the firm is issuing $300 million worth of preferred units, plus it’s providing an underwriter’s option of $45 million. Net proceeds should end up being around $330.63 million in all.
During the time that these units remain outstanding, investors are to be paid an annual dividend of 6.50%. The plan is to make this a cash payment, but under certain circumstances, management may pay it with additional stock or a mix of cash and stock. On September 1st of 2023, these units will mandatorily convert, with the firm’s common share price leading up to that point dictating the conversion ratio.
The lower bound set is 11.9048 shares for every $100 liquidation preference unit, and the upper bound is 14.2857 shares. Holders of these units may convert prior to this date, but then it would be done at the minimum conversion ratio. These preferred units will cause between 41.07 million and 49.29 million additional common units to be issued if the business sees them converted. This will increase shareholder dilution from the aforementioned 13% to between 22.9% and 24.7%.
Not every move made by management involves dilution though. The company is also issuing $850 million worth of Senior Secured Notes that will come due in 2025. They bear an annual interest rate of 7.375%. The amount issued is a significant increase over the $300 million initially intended. Management intends to use the proceeds from this issuance to redeem its 5.375% Senior Notes due in 2023 in full. This works out to $530 million in principal value of debt.
It’s unsure how the rest will be allocated, but management did say that they intend to allocate it toward other senior indebtedness. One bad thing about this move is that it will cause annual interest expense to rise. Just on the $530 million notes alone, the difference in interest rate will result in additional annual interest expense of $10.6 million moving forward.
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