Some back of the envelope calculations on the offereing. If net proceeds are $214 million and that is used to pay down their debt that would save about $16,852,500 of interest ($214 million x 7.875% interest on senior notes per the Q3 10Q filing). But they have to pay dividends on the 8 million shares at $2.43 per share per year. That will be $19,440,000, which is more than paying the interest on the loans. So I'm trying to figure out if this is really a good thing??
Thoughts would be appreciated or corrections to my simple calculations.
Hi JustAnother Name:
You are forgetting the additional income from the acquisition that was purchased and will in time turn into additional and growing distributions which is why we invested in VNR in the first place. The important thing to realize (In my opinion) is the turmoil that is caused by others that don't understand the process and are fearful, and that causes the unit price to be lowered to accomplish the unit sale. Those that understand what's happening are buying at the temporarily depressed price because there is nothing bad that happened between yesterday at 4:00 PM and now to cause a price reduction of $2.26 from yesterday's close.
In fact the $2.26 price saving is equal to more than 11 monthly distributions of $0.2025= $2.2275. Buying additional units at the current reduced price will in effect give you approximately 23 monthly payments in the next 12 months when the price returns to the $28.94 yesterday's closing price.
IMHO this is a good event for VNR and its current unitholders and is an even better event if one understants VNR's business model and takes advantage of the situation and buys more units.
I hope this helps
Thank you for your post. Let me say that I am long VNR and I'm a shareholder. But I wanted to continue the discussion and address the points you raise:
1. You say I'm not factoring in the acquisition, which will lead to growing distributions. That would have been the case even if they didn't do the offering.
2. You say nothing bad happened between 4pm yesterday and now to cause a price reduction. But in fact, something bad did happen...dilution, which doesn't seem to save the company money based on my simple cash flow calculation.
3. You are assuming the price will rise back up to yesterday's closing price. Nothing is a certainty but I do know if they didn't do the secondary then the price would not have dropped by $2.26 that you state.
So in my simple way of thinking the only thing this secondary did was to pay off debt, which is what the press release stated. If that payoff of debt doesn't save money then how is that helping? As ruswise stated it is to free up cash for acquisitions, which could be a possibility, but you can also do acquisitions via stock. Maybe the answer is that as a company you just don't want to be carrying a lot of debt, even at the expense of being worse off fron a cash flow perspective.
But acquisitions don't have to be done with cash. They can use stock to do an acquisition, which would be a more direct route, probably cheaper since you are not doing a secondary, and not freaking out investors who hate secondaries. Typically I've seen secondaries as a way to grow the business or if it is to pay down debt there is a net savings.
Not sure it might be a bit worse than you say. The notes to the 9/30/12 10Q say the interest on the senior secured notes was 2.22% but floats. Was 2.55% a year earlier. That interest cost is a big $12.6 million a year on the stated principal of $570 mill. Maybe it’s just a reluctance to keep holding debt, but seems like the offering costs them almost $7 mill a year. I too am a holder, but hard to understand.