Broadcom AVGO has priced an upsized offering of $3.25 billion of shares of “Mandatory Convertible Preferred Stock.” The principal amount of the notes will carry an interest rate of 8% and has been upsized from $3 billion. Notably, the stocks will be convertible at a conversion rate of 3,250,000 shares of the company’s Series A “Mandatory Convertible Preferred Stock” per $1,000 principal amount of Notes.
The offering of the notes will be closed by Sep 30, 2019, subject to customary closing conditions. The offering highlights the company’s intention to repay outstanding amount under its revolving credit facility.
The company will also provide a 30-day option to underwriters to purchase up to an additional 487,500 common stocks to cover over-allotments, if necessary. The shares will be offered in accordance to the shelf prospectus previously filed with the Securities and Exchange Commission.
Broadcom aims to utilize the net proceeds of around $3.2 billion (or $3.7 if the underwriters exercise their option to purchase additional shares in full) from the offering after discounts and commissions to repay the borrowings pertaining to the company’s revolving credit facility on a pro-rata basis.
The stock offering will aid the company meet its financial obligations efficiently and boost financial flexibility. Moreover, it provides ample scope for deploying capital for long-term growth opportunities and rewarding higher returns to stockholders, at the same time.
Morgan Stanley, J.P. Morgan Securities LLC, BofA Merrill Lynch and Citigroup are acting as joint book-running managers for this offering.
Shares of Broadcom have returned approximately 11.9% year over year, outperforming the industry’s rally of 4.4%.
Debt & Cash Profile
Broadcom has a highly leveraged balance sheet. The company exited third-quarter 2019 with a long-term debt of approximately $37.565 billion as compared with $37.548 billion in the prior quarter. The current notes offering will not only help in paying down a share of its term loan, we believe that it will also add to Broadcom’ existing debt balance.
Broadcom exited the third quarter with cash and cash equivalent balance of $5.462 billion, up from $5.328 billion reported in the previous quarter. The company generated cash flow from operations of roughly $2.419 billion compared with $2.667 billion in the prior quarter. Free cash flow during the third quarter was $2.307 billion, down from $2.542 billion reported in the second quarter.
We believe that the senior notes offering will lower Broadcom’s cost of capital, consequently strengthening balance sheet and growth initiatives.
Bottom Line
Broadcom has an excellent earnings surprise history with the stock surpassing the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 3.4%. Moreover, the Zacks Consensus Estimate for the company's earnings growth is pegged at 2.3% and 8.2% for 2019 and 2020, respectively.
The company’s strong relationships with leading OEMs across multiple target markets have helped it in gaining key insights into the requirements of customers. These insights have enhanced the company’s efficiency and productivity in serving the target markets and customers better.
Further, Broadcom’s expanding product portfolio makes it well poised to address the needs of rapidly growing technologies like IoT and 5G.
Zacks Rank and Stocks to Consider
Currently, Broadcom carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader technology sector are Alibaba Group Holding Limited BABA, Chegg CHGG and Synopsys, Inc. SNPS. All three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for Alibaba, Chegg and Synopsys is currently pegged at 28%, 30% and 12%, respectively.
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