American Greetings plans bond tender, converts exchange, probably will sell bonds

By Paul Deckelman

New York, April 6 - American Greetings Corp. plans to celebrate its 100th year in business with an ambitious capital structure overhaul that company executives say will leave the venerable Cleveland-based maker of greeting cards, wrapping paper, party goods, calendars and other such "social expression" products in a position to fulfill its twin goals of investing more resources in its core cards business, as well as investing in its own stock through a continuing share buyback program.

To that end, it unveiled an ambitious multi-part plan Thursday that includes a tender for its existing 6.1% senior secured notes due 2028 - likely to be funded in part by a $200 million issue of new notes - an enlargement and structural revision of its bank debt facility, an exchange offer for its existing convertible notes, and a reduction of its accounts receivable securitization program.

All told, the company's chief executive officer, Zev Weiss, told analysts on a conference call following the release of its fiscal 2006 fourth quarter and year-end results, the company will put in place up to $1 billion of new or amended financial instruments to replace $875 million of existing debt instruments, and provide the company with additional capital for its share repurchases.

"The goal of our capital structure changes is to permit the investment in our card business, while simultaneously provid[ing] flexibility for potential return of capital to our shareholders," Weiss said. "By accessing multiple capital markets during a very receptive time for debt issuers, we are opportunistically enhancing our capital structure to take advantage of favorable rates and terms."

Weiss and the company's chief financial officer, Michael J. Merriman, told analysts on the call that American Greetings plans to spend some $75 million in the 2007 fiscal year that began on March 1, and additional monies over the next few years to improve its cards business - the foundation of the century-old company's activities, and still the source of more than 50% of its revenues. It will pour money into improving the design, production, display and promotion of its far-flung cards line, which includes everything from traditional birthday, holiday and get-well cards to cards for virtually any occasion.

"If we can drive point-of-sale increases, or win additional [market] share, or both, our investment will be a success," Weiss declared. "I believe that a combination of great product, great merchandising and great marketing will drive increased point-of-sale, and a return in excess of our cost of capital."

In order to do that, and to continue what Weiss called the company's second strategy - to "more aggressively" invest in its stock "when we believe them to be trading at a discount to their intrinsic value," the executives outlined the capital structure changes.

Plans tender for 6.1% notes

American Greetings will tender for its $300 million of outstanding 6.1% notes. Although these are officially slated to mature on Aug. 1, 2028, they are putable back to the company by investors in the summer of 2008. The company cannot call them. Merriman said that "given the objective of extending our maturity structure, the possibility of a put in a couple of years and the combination of our cash position and the excellent bond market condition for issuers, we have decided to refinance this bond issue now." The tender was launched Thursday and will expire in May. The CFO said that the company expects more than two-thirds of the bondholders to tender the bonds.

$200 million notes to follow

He said that "over the next couple of months," the company anticipates issuing $200 million of new 10-year senior unsecured notes, with the proceeds expected to be used to help repay the 6.1% notes, as well as other corporate purposes.

Although it is likely that this bond issue will be done - the company's news release said that it would take place in the next two months - Merriman phrased it more conditionally, saying "if we elect to proceed with this financing."

Exchange for convertibles

The company on Thursday also began an exchange offer for its outstanding $175 million par value of 7% convertible subordinated notes that are slated to come due on July 15. The new notes being given to the convertibles holders in exchange for their old ones - which have a current market value of approximately $275 million - have essentially the same terms, but will allow the company to settle the issue at maturity for a combination of stock and cash, rather than just for stock, as the current notes, like most older converts, are structured.

Merriman said the company - which would otherwise have to issue about 12.6 million new shares when the notes mature - anticipates a mixture of two-thirds cash and one-third stock for the total consideration - limiting the potential dilution of the company's shares when the converts mature.

He said that assuming that all of the current convertibles are exchanged for the new notes, American Greetings will be able to settle those with a mixture of $175 million of cash and the rest in stock, reducing the potential 12 million-plus share dilution of the current stock float by two-thirds.

New loans completed

Another leg of the financing plans - which has already been completed - enlarged and changed the structure of the company's senior credit facility, which had the effect of improving the company's liquidity substantially.

American Greetings increased the size of its revolving credit facility to $350 million from $200 million and put a new $300 million term loan in place. The new revolver has a five-year life, thus extending the maturity beyond the old revolver's expiration date, while the term loan has a seven-year life.

Merriman said that the new term loan has a delayed drawdown feature, permitting the company to draw it down at any point over the course of the next year. He said that if the term loan is drawn amortization will be a minimal amount - 25 basis points of the principal amount due each quarter, with a bullet for the remaining roughly 93% that will be due in seven years.

Fewer receivables

He said that the company had, at the same time, reduced its accounts receivables securitization structure to $150 million from $200 million - a change which he said recognizes the reduced accounts receivables that the company is carrying as more of the retailers through whom it sells its cards and other products have shifted to scan-based trading - the use of the same bar-code technology that retailers have been using for years to ring up sales of most products and to keep track of their in-store inventories, to also - in theory - give a more accurate picture to vendors such as American Greetings of just what goods are sold at which stores and in what quantities, making for easier, more accurate invoicing and stock replenishment.

"As the pool of eligible receivables has been reduced," the CFO said, we have simply reduced the size of this form of financing to reflect that reduction.

Plans more stock buybacks

With its enlarged and improved capital structure, American Greetings intends to continue rewarding its shareholders, by buying back stock.

The company said that during the 2006 fourth fiscal quarter ended Feb. 28, it purchased 4.3 million shares of common stock for $93.8 million. About $51 million of that share repurchase spending represented the completion, in January, of a $200 million stock buyback program that was begun in April 2005. The other roughly $43 million of shares bought back during the just-completed quarter were part of a second $200 million repurchase program announced in February.

The executives further said that the company bought back another $52.8 million of stock, or 2.5 million shares, in March, at the start of its 2007 fiscal first quarter. Figuring the stock buybacks in February and March, it has repurchased about $96 million of stock, or roughly 48% of the second repurchase program. Assuming the second repurchase program is completed, the company will have reduced its outstanding shares by more than 30% since the beginning of the 2006 fiscal year in March 2005.

When asked by an analyst during the question-and-answer portion of the conference call whether the company had any plans for a debt pay down, the company executives did not directly address the question. They said that under the new structure, the company will likely have the $200 million of new bonds outstanding and, depending on the level of share repurchases, it might have up to the full $300 million of the term loan drawn, although Weiss said "that's the big unknown at this point." It will also likely have about $50 million in letters of credit debt outstanding by the end of the current fiscal year.

Merriman said that the changes to the capital structure will cost the company $10 million to $15 million, which will mostly show up in the current quarter.

Weiss said that the company would not give out quarter-by-quarter earnings guidance because of the difficulty of figuring out per-share estimates given the ongoing stock buyback program and the convertibles exchange offer. For fiscal 2007, it is projecting earnings per share to be between 80 cents and $1. The estimate includes the $74 million investment expenditure in its card business, the completion of the second $200 million of share repurchases, completion of the exchange offer for its convertibles, completion of its tender offer for the 6.1% senior notes and the issuance of the expected $200 million of new 10-year notes.

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