This morning DDOG released news of $550 million aggregate principal amount of convertible senior notes due 2025, with an option to purchase up to an additional $82.5 million aggregate principal amount of notes.
It seems like they will be used for the purchase of capped call transactions to offset potential dilution from the offering. It goes on to say if the stock prices exceeds the capped call price then dilution would occur.
Does anybody with a better finance background know if this means the full $550mil dilution could occur at a given stock price? (I don’t see a price given yet)
Also I wanted to add that it looks like their main use of the cash from the offering will be to “to pay the cost of the capped call transactions” and the remainder for potential acquisitions/strategic transactions.
It was my understanding that DDOG had ~775mil cash and almost no debt. So I don’t see why they needed this. Were the capped calls to offset dilution coming from a previous convertible bond offering?
The best time to add free money is whenever you can, not when you need it!
Details will be set on closing, the interest rate will be like all the others, less than 1%, and the capped call transactions appear to be standard now with everyone’s convertible offerings these days.
The main use of the offering is not the cost of the capped call transaction (which is the cost of the offering basically). They simply do these call options to manage dilution.
The real reason is the second part: acquisitions and strategic transactions. Basically, they are taking advantage of a very high stock price and very cheap capital to increase their cash position and take advantage of market opportunities. If they can continue to have a high return on invested capital this is good for shareholders.
Thanks Diablito and Matt for the replies. I understand the interest rate will be low. I know AYX did a similar type deal in 2019. I am was more worried about potential for $600mil+ dilution of shares with increase in shares price. But it seems the capped calls will offset them some.
I thought the cash position was pretty sold before this, but will have to wait and see what they are planning to do.
Terms were set for this offering and the amount was upsized. Interested rate is very low and it seems like the lenders are pretty bullish on DDOGs future. Potential dilution of ~7.5 mil shares.
$650M of 0.125% convertible notes due 2025 in a private placement prices. Initial conversion price of ~$92.30 per share of class A common stock.
The company estimates net proceeds will be ~$634.2M (or $729.4M if initial purchasers exercise their option to purchase additional notes in full).