Vodafone plans to raise about R63bn selling bonds convertible into shares to fund the acquisition of some of Liberty Global's European businesses without weighing down the phone giant's balance sheet.
The two sets of sterling-denominated securities will help pay for the R311bn purchase of Liberty Global's German and Eastern European units, part of the UK telecommunications company's push to refocus on the continent after years scaling back its global ambitions.
Vodafone chief executive officer Nick Read is trying to rein in debt as he prepares to close the Liberty deal, which still needs approval from European competition authorities. The convertible bond sale plans, previously reported by Bloomberg, follow Vodafone's issuance of almost R54bn of mandatory convertible bonds three years ago.
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"There hasn't been much issuance in Europe recently so this deal may be well received by investors if it comes with attractive terms," said Ivan Nikolov, portfolio manager at NN Investment Partners. "Vodafone is one of the stronger issuers in the convertible universe."
The company said it could buy back shares to mitigate dilution and fund the purchase by issuing hybrid securities.
Vodafone shares rose 2.2% to 134.18 pence as of 10:20 in London.
It's getting harder for companies to justify heavy borrowing to reward shareholders with dividend payouts, stock buybacks and acquisitions. Companies have been turning to convertible bonds, which offer a compromise. In 2017, Bayer announced the sale of €1bn worth of bonds convertible into shares of Covestro to cut its stake in the chemical company.
The hybrid securities are also in a sweet spot at the moment, with the Bloomberg Barclays US Convertibles Composite Total Return index soaring to a record last week, after a blistering 12.1% rally to start 2019.
Until recently, BBB rated debt - a group that includes Vodafone - had been at the epicenter of concerns that corporate leverage could set off the next global downturn. This $2.5trn (R35trn) portion of the market is composed of companies on the last rung of the investment-grade ladder.
The fear, expressed by the likes of Marathon Asset Management's Bruce Richards and Barclays chief executive officer Jes Staley, was that if downgraded to junk, these so-called "fallen angels" could trigger a liquidity crisis.
When Vodafone announced the Liberty deal last year, it said it would sell around €3bn of convertible securities to help fund it, allowing the company to retain a "solid" investment-grade rating. Read has since suspended a pledge to keep dividends growing and is also attempting to partner with rivals on phone towers to cut costs as carriers prepare to build out fifth-generation wireless networks.
Credit rating firm Moody's Investors Service last month cut Vodafone's debt to Baa2, two levels above junk, from Baa1 because of the Liberty deal.
A transaction as large as Vodafone's convertible bond issuance is rare for investment banks in in the region this year, with volumes of share sales lagging 2018. Companies and their shareholders in the continent have raised $5.9bn from stock sales year-to-date, a fraction of the approximately $21bn worth of stock sold in North America and Asia, according to data compiled by Bloomberg.
Bank of America, BNP Paribas, HSBC, JPMorgan Chase & Co and Morgan Stanley have been selected to work on the transaction, people familiar with the matter said on Monday, asking not to be identified as the details aren't public.
Representatives for Morgan Stanley, Bank of America and JPMorgan Chase and BNP declined to comment on Monday.
A representative for HSBC didn't have an immediate comment.