Market players eye offerings from Dominion Energy, Vonage, Zynga; new paper looks cheap

By Abigail W. Adams

Portland, Me., June 11 – All eyes were on the convertibles primary market on Tuesday with some highly anticipated new paper slated to price after the market close.

Dominion Energy Inc. plans to price $1.25 billion of $100-par series A equity units, Vonage Holdings Corp. plans to price $300 million of five-year convertible notes and Zynga Inc. plans to price $600 million of five-year convertible notes.

The deals looked cheap based on underwriters’ assumptions, sources said.

However, each deal carried unique attributes which either increased their appeal or diminished their attractiveness.

With the new paper in the works, the secondary space was slow on Tuesday with Fortive Corp.’s 0.875% convertible notes due 2022 the only name to see more than $10 million in reported volume, a market source said.

The notes were largely trading sideways with accounts most likely making room for the new paper.

Dominion’s equity units

Dominion Energy plans to price $1.25 billion of $100-par series A equity units with price talk for a dividend of 7.25% to 7.75% and a threshold appreciation premium of 17.5% to 22.5%.

Each unit will consist of a three-year common stock purchase contract and a 1/10th interest in perpetual convertible preferred stock.

Underwriters were marketing the deal with a credit spread of 75 basis points over Libor and a 17% vol., according to a market source.

Based on those assumptions, the deal modeled about 2.36 points cheap at the midpoint of talk, a source said.

The books on the deal closed by midday, an indication of strong demand, a source said.

The equity units carry a “nice yield,” which is exceptionally attractive given the company’s desire to slow the growth of dividend payments on its common stock, a market source said.

Dominion Energy’s common stock currently yields about 5% with the company paying out about 80% of its earnings in dividend.

While the equity units have dividend protection, the company’s statements regarding the future of the dividend on its common stock makes the equity units even more attractive, the source said.

The Richmond, Va.-based electric and natural gas energy company is also a repeat issuer of convertible preferreds.

One of the company’s mandatory convertible preferred issues is about to mature, a source said.

The equity units will also be rated BBB-.

With an investment-grade rating and mandatory convertible preferreds in demand, the equity units are expected to do well.

Vonage comes cheap

Vonage Holdings plans to price $300 million of five-year convertible notes with price talk for a coupon of 1.5% to 2% and an initial conversion premium of 40% to 45%, according to a market source.

The deal is in the market with a credit spread of 300 bps over Libor and a 35% vol., according to a market source.

Using those assumptions, the deal modeled 2 points to 2.375 points cheap at the midpoint of talk, some sources said.

Another source saw the deal up to 4 points cheap.

The volatility assumptions appeared to be discounted and could have been much tighter, a source said.

While the coupon on the deal is much more attractive than Zynga’s offering, the conversion premium was “a little absurd,” a market source said.

However, the Holmdel, N.J.-based cloud communications provider’s stock is about $11.

Stocks with low prices and high growth potential can easily swallow a large premium, a source said.

However, some sources were not overly impressed with the company’s fundamentals.

Vonage’s deal is pricing as part of a “happy meal” with $10 million of proceeds to be used to repurchase common stock.

The share repurchase will enable a bigger hedge on the stock.

It will also attract more outright buyers because it will limit the downside risk from stock volatility, a source said.

Vonage stock was down more than 4% during the subscription process, trading as low as $11.33 before closing the day at $11.73, a decrease of 3.22%.

Zynga eyed

Zynga plans to price $600 million of five-year convertible notes with price talk for a coupon of 0.25% to 0.75% and an initial conversion premium of 30% to 35%.

The deal is being marketed with a credit spread of 250 bps over Libor and a 34% vol., according to a market source.

Sources pegged the deal between 1 point and 3 points cheap at the midpoint of talk.

Some sources felt a tighter vol. was warranted, which would place the deal more at fair value.

However, other sources felt the vol. was discounted.

The San Francisco-based social game developer is the first U.S.-based video game company to price a convertibles deal in some time, a market source said.

Zynga recently entered into a $600 million sale-leaseback deal with Beacon Capital Partners, LLC for its headquarters building in San Francisco.

With potential acquisitions and strategic transactions listed as a possible use of proceeds from the convertible notes offering, sources expect the company to engage in some M&A activity.

The credit spread is warranted given Zynga’s current financial position, a source said.

However, when acquisitions are involved in offerings, investors are taking “a leap of faith,” a market source said.

The current credit spread does not leave room for much upside, and a bad acquisition could drastically alter the company’s current financials.

Mentioned in this article:

Dominion Energy Inc. NYSE: D

Fortive Corp. NYSE: FTV

Vonage Holdings Corp. NYSE: VG

Zynga Inc. Nasdaq: ZNGA

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