Monday, January 23, 2006

AMD offers $500 million common stock, impact on EPS

AMD announced that it will sell $500 million common stock, and it would use $226 million to pay back 35% of the 7.75 percent senior notes due 2012. Let's compute the effect on AMD's 2006 EPS.

1) Additional shares, based on AMD's current stock price of $35 is:
500/35 = 14.3

2) Total diluted shares: 453+ 14.3 = 467.3 million, where 453 million is the fully diluted shares before the offering.

3) Reduction in interest payments: $226 * 0.0775 = 17.515 mil

4) Interest earned on the $274 million cash on assumed interest rate of 3%: $274 * 0.03 = 8.22 million

5) Assuming original EPS is E, we compute the new EPS due to the stock offering:

Net income = E * 453 + 17.5 + 8.2

EPS = (E*453+ 23.7)/467.3 = E * 0.9694 + 0.0507

Now assume original EPS of $1.8 (AMD's forward P/E is 20.6), plugging into the above formula, we get new EPS

1.8 * 0.9694 + 0.0507 = $1.7956

Clearly, if original EPS was lower, then this stock offering will actually increase EPS.

Earlier, AMD announced that it would force conversion of $500 million 4.75% Convertible Senior Debentures Due 2022 (dilution from these convertibles were already added), adding today's offering, AMD will reduce its long term debt by a massive $0.726 billion. From AMD's 4Q04 balance sheet, AMD has long term debt of $1.327 billion, it will be reduced to $601 million. AMD is getting to its 20% debt/equity goal in a snap.

Also keep in mind that the conversion of the 4.75% debentures will also reduce interest payment by 500 * 0.0475 = $23.75 million, or adding EPS of 23.75/467.3 = 0.0508.

So, considering the $500 million conversion and the $500 million stock offering, our adjusted EPS formula should be:

(E*453 + 17.5 + 8.2 + 23.75) /467.3 = E * 0.9694 + $0.1058

Considering the fact that Merill Lynch is the underwriter of this $500 million offering, Joe Osha's downgrade of AMD to "sell" on January 17, 2006 becomes very disturbing.

AMD entrusted Merill Lynch to sell $500 million of stocks. Merill Lynch then deliberately pushed down AMD's stock price.

What kind of treachery is this?

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