Vodafone Planning $4.5 Billion Convertible Bonds Sale

(Bloomberg) -- Vodafone Group Plc plans to raise about 4 billion euros ($4.5 billion) selling bonds that will be converted into shares to fund the acquisition of some of Liberty Global Plc’s European businesses without weighing down the phone giant’s balance sheet.

The two sets of sterling-denominated securities, announced Tuesday, will help pay for the $22 billion purchase of Liberty Global’s German and Eastern European units, part of the U.K. 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 mandatory convertible bond sale plans, previously reported by Bloomberg, follow Vodafone’s issuance of almost 2.9 billion pounds ($3.8 billion) of mandatory convertible bonds three years ago.

“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.”

Vodafone said it expects the mandatory convertible bonds, excluding the value of coupon payments, to be accounted for as equity. They are scheduled to convert into shares in 2021 and 2022. The company said it could buy back shares to mitigate dilution and fund the purchase by issuing hybrid securities.

Vodafone shares rose 2.2 percent to 134.18 pence as of 9:20 a.m. in London.

Compromise

As it’s become harder for companies to justify heavy borrowing to reward shareholders with dividend payouts, stock buybacks and acquisitions, they’ve been turning to convertible bonds, which offer a compromise. In 2017, Bayer AG announced the sale of 1 billion euros worth of bonds convertible into shares of Covestro AG to cut its stake in the chemical company.

The hybrid securities are also in a sweet spot at the moment, with the Bloomberg Barclays U.S. Convertibles Composite Total Return index soaring to a record last week, after a blistering 12.1 percent 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 $2.5-trillion 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 LP’s Bruce Richards and Barclays Plc 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 3 billion euros 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.

Rare Sale

A transaction as large as Vodafone’s convertible bond issuance is rare for investment banks in the region this year, with volumes of share sales lagging 2018. Companies and their shareholders across the continent have raised $5.9 billion from stock sales year-to-date, a fraction of the approximately $21 billion worth of stock sold in North America and Asia, according to data compiled by Bloomberg.

Bank of America Corp., BNP Paribas SA, HSBC Holdings Plc, 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. A representative for HSBC didn’t have an immediate comment.

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