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Amazon Sells $3B in Debt

Zacks Equity Research

Amazon.com Inc. (AMZN), the world’s largest online retailer has recently announced a public offering of bonds aggregating $3 billion. These bonds have been issued in three tranches of different amounts, with varying coupon rates and maturities.

The first tranch of $750 million carries a coupon rate of 0.65% and will mature in 2015. The second tranch of 1 billion, with a coupon rate of 1.2%, will mature in 5 years and the third portion of $1.25 billion carrying a coupon rate of 2.5% will mature in 10 years.

The 0.65% securities will yield 38 basis points more than similar securities in the market; the 1.2% securities will yield 63 basis points while the 2.5% notes will yield 93 basis points more than benchmarks.

Amazon stated that the transaction proceeds will be used for general corporate purposes and to fund a part of the $1.16 billion real-estate transaction.

Last month, Amazon had announced its intention to purchase its corporate headquarters in the South Lake Union neighborhood for $1.16 billion from Vulcan Inc., the investment firm of Microsoft co-founder Paul Allen. The company expects to complete the entire real estate transaction by the end of the fourth quarter.

Amazon is one of the leading players in the extremely fast-growing retail ecommerce market and its strength lies in its huge scale of offerings, its broad reach and platform approach. Amazon has limited debt and $5.25 billion in cash on its balance sheet.

We believe Amazon’s strong balance sheet helps the company to capitalize on investment opportunities and strategic acquisitions, thereby further improving growth visibility. Going forward, we believe the company will continue to experience strong growth.

However, at the same time, we think that there is a certain amount of uncertainty regarding Amazon’s investment plans, which could pressure earnings in the near term. In the recently reported third quarter, the company suffered a huge loss of 60 cents due to its investment focus. The company is making heavy investments in its Kindle tablet computers, new warehouse and data centers, which will continue to weigh on its near-term results.

Amazon currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

At the moment, however, most of Amazon’s competition (whether direct or indirect) continues to come from eBay Inc. (EBAY) and Barnes & Noble, Inc. (BKS), which retain a Zacks #2 Rank equivalent to a short-term Buy rating, while Google (GOOG), carries a Zacks #3 Rank (short-term Hold rating).

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