The convertible notes, equal to about 15% of the company's market value, convert at $31.21 a share and come with a capped call and a $150 million buyback. The stock fell 6.4% when the deal was proposed while cybersecurity peers barely moved.
SentinelOne lined up more than a billion dollars that carries no regular interest. Its shareholders had a costly day anyway.
The cybersecurity company priced $1.25 billion of convertible senior notes due 2031 just after midnight on Wednesday. The notes "will not bear regular interest, and the principal amount of the notes will not accrete." Each $1,000 note converts into 32.0379 shares, an initial conversion price of about $31.21, or 30% above Tuesday's closing price of $24.01. The initial purchasers have an option to buy another $187.5 million of notes, and the sale is expected to settle on Oct. 16.
The three moving parts
The package is built to offset the cost of conversion. SentinelOne is spending about $131.6 million on capped call transactions, which are "expected generally to reduce the potential dilution" if the notes convert, up to a cap of $48.02 a share, double Tuesday's close. It is also using about $150 million to buy back about 6.2 million shares from purchasers of the notes, at $24.01.
The arithmetic shows how large the deal is relative to the company. At Tuesday's close SentinelOne's market value was about $8.1 billion, so the notes equal about 15.5% of it. If every note converted into stock, they would produce about 40 million shares, roughly 12% of the share count, before the capped call's offset and before any decision by SentinelOne to settle conversions in cash, shares or a mix. The buyback retires about 1.8% of shares now.
Net proceeds are about $1.224 billion. After the capped call and the buyback, roughly $942 million remains for "general corporate purposes," which the company said may include "additional repurchases," working capital, capital spending, and "potential acquisitions and strategic transactions or investments." SentinelOne also said it plans a $400 million secured revolving credit facility and is in talks with lenders.
The reaction
The shares fell 6.43% to $24.01 on Tuesday on volume of about 27.6 million, roughly five times the prior day. The break began in premarket trading shortly after the 6:55 a.m. proposal. The stock opened at $23.46, its low for the day, rallied to about $25.33 within 15 minutes, then faded into a heavy final half-hour.
The selling was specific to SentinelOne. CrowdStrike, Palo Alto Networks, Zscaler, Fortinet and Okta moved between a 1.7% loss and a 1.3% gain, an average of about 0.5% down, and cybersecurity ETFs were nearly flat. Convertible investors often hedge by shorting the stock, but how much of Tuesday's selling that accounts for is not known. The pricing release, issued after midnight, says the capped-call counterparties expect to buy shares around the pricing, activity that could support the price.
Before the deal the stock had climbed about 33% from $19.75 on Sept. 11 to $26.27 on Oct. 9, so the company raised money near the top of its recent range.
Market implications
One reading is that SentinelOne locked in cheap, flexible capital. It pays no regular interest for five years, conversion begins 30% above the current price, the capped call protects holders up to a doubled share price, and the buyback shrinks the share count today.
A second reading is that shareholders absorbed a large, open-ended claim. The notes equal about 15% of the company's value, most of the money has no named use, a secured credit line is on the way, and protection ends at $48.02.
What to watch
Settlement on Oct. 16, whether the initial purchasers take the extra $187.5 million, the terms of the revolving credit facility and any acquisition announcement will show how the cash is used.