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United Natural Foods, Inc. Message Board

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  • wooglin_kai wooglin_kai Sep 28, 2010 10:00 AM Flag

    Wow - over 10% increase in shares outstanding

    "Especially surprising considering they are paying only LIBOR + ~1% on most of their debt, a very low rate (1-mo LIBOR is currently 1/4 of 1%).
    Why would they dilute and sell so much of the stock to pay debt when they're paying so little for their credit? They also reduce their operating leverage".

    According to Yahoo (which can be dangerous), UNFI has approx $296M in debt. Offering is for 3.85M shares. Assuming the offering is around 35 bucks less fees, UNFI will receive around $130M or LESS than half of its debt. Selling shares when the company's share price is relatively high makes sense. UNFI is only paying 1% + LIBOR for "most of their debt"??? In other words, "most" of UNFI's debt is revolving? Some day rates will go up; I have no problem with UNFI paying down some of its revolving credit--of course, the other route would be to sell some term debt to take advantage of the low rate environment. Apparently UNFI likes selling more shares at this level. Any long can step up and increase their holdings by 10% if they're concerned about dilution.

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    • That's just it - if you want to keep your same percentage stake in the company, you have to put up 10% more money.

      Or in other words, all current holders stakes' will be 10% less soon, and that's likely why the stock is selling off.

      It's simple math - to maintain equilibrium in the market cap, the share count goes up, PPS goes down, EPS numbers have to come down, etc.

      So one conclusion could be management agrees with you that the share price is high and selling stock is a good idea.

      As for debt management, look around. Most companies everywhere are selling term debt at attractively-low rates (even cash-rich MSFT), and buying back their own stock.

      Yet, here UNFI is doing the exact opposite: giving up ~1% interest rates and selling their stock instead. Would you do that? It kind of boggles the mind.

      • 2 Replies to box_o_stox
      • This is (unfortunately) true with the math.

        All other things being equal, a 10% increase in share issuance would equate to a 9% drop in the share price.

      • Assuming UNFI is only paying 1% plus LIBOR (seems cheap to me) for its REVOLVING CREDIT, UNFI obviously considered this and came to the conclusion that the share sale was the best course of action. If an investor or potential investor doesn't like how management is doing, they may want to sell their shares. Who knows what UNFI's longer term plans are, by selling shares at the current, relatively high level, UNFI improves its balance sheet and presumably allows them to take on more debt in the future if necessary.

        Re MSFT, from what I read, a primary driver for its debt sale was that alot of its cash is abroad (and invested). To repatriate this cash would be costly from a tax angle.

        Cheers

    • I may have been a tad aggressive with my guess with the price the shares will be sold at...perhpas 32 - 33 bucks???

 
UNFI
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