Mark Gritter (markgritter) wrote,
Mark Gritter

$700 million

On the same day that Sun announced its 2nd-quarter results, they also announced that they'd gotten $700 million in funding from KKR. I read the 8-K for this transaction today and found it sort of interesting.

KKR gets a $350 million note due in 2012 paying 0.625% interest and a $350 million due in 2014 paying 0.750% interest. KKR in turn got $350 million in financing from Citibank. KKR also gets to appoint a member of the board of directors for as long as they hold at least $350 million.

The notes are convertible to stock at a rate of about $7.21 per share (with some technicalities I don't understand.) Sun is at $6.42 today, closer to $6 when the deal was signed.

Then Sun turned around and used some of the cash to hedge with Credit Suisse. For $228 million Credit Suisse took on all the risk that the conversion to stock exceeds the face value of the notes.

Then "in a separate transaction" Credit Suisse turned around and bought warrants to purchase 97,053,726 shares of Sun stock, half at $9.2320 (maturing in 2012 when the first note comes due) and the other half at $10.0975 (in 2014.) Sun got a total of $145 million for the warrants.

What are the financial implications? Let's look at May 2012, which is half the deal. Everything depends on Sun's stock price.

At $6.00 KKR loses about $50 million (probably more due to the Citibank financing which I can't take into account.) Sun actually comes out about $8 million dollars ahead (and got to play with $310 million in the meantime) by paying off the notes with cheap stock, and Credit Suisse pockets their $36 million. There's a couple million that goes other places.

At $7.00 KKR breaks even. Sun pays abut $40 million and Credit Suisse is still sitting on the $36 million they got up front.

At $8.00 KKR makes $50 million. Sun pays $51 million but the hedge has kicked in and Credit Suisse loses about $2 million (but probably has made up for that by investing the $36 million cash.)

At $9.00 KKR makes $98M, Sun still pays $51M, and Credit Suisse loses $50 million.

At $10.00 KKR makes $147M, Sun pays $88M because Credit Suisse exercises their warrant, and Credit Suise loses $62M (which is their cap.)

What does this tell us?

KKR has to believe they stock is headed toward $9, because they could earn $88M by putting $350M into 5% bonds for 5 years. They'd also be better off with a buy-and-hold strategy, though obviously it would be difficult for them to obtain >2% of the outstanding shares without causing ripples. Or, it is possible they believe having a member on the board will position them to take advantage of other opportunities.

Credit Suisse doesn't believe Sun will go above $8.50 or so; the hedge starts losing them money at that point. (Either one may have other things going on which change their costs by hedging or arbitrage.)

What about Sun itself? It gets financing fairly cheaply in any reasonable scenario and a substantial increase its available cash. (I thought it was $1B but others say more like $3B.) But what does it need the cash for? We've been cash-flow positive for a while. What can Sun do with $310M in the next 5 years that's worth paying $51M for?
Tags: work
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