Dimension Data`s share surged this morning after investment holding company VenFin agreed in principle to subscribe fully to a new $100 million seven-year convertible bond issued by Dimension Data.
If converted, the bond will provide VenFin with 12.3% of the enlarged fully diluted share capital of Dimension Data.
<B>Glossary</B>
A convertible bond is a loan to a company that can be converted into shares or other financial instruments if certain criteria are met. Criteria can include a rise in the share price or interest rates.
A coupon is an annual payment to the lender at a fixed percentage of the loan amount, which is over and above the final interest rate.
Therefore DiData has borrowed $100 million from VenFin. In seven years, DiData will either have to pay the money back or VenFin will convert the loan into shares.
The basis for the convertible bond terms will be the share price at the close of business on 1 November, which was 23.5p.
The bond will carry a coupon of 5.375% and will be convertible at $0.5317 per share (34.075p at a fixed exchange rate).
The bond will be unlisted and, if not previously redeemed or converted into ordinary shares, will be redeemed at 103.12% of its principal amount in 2009.
Dimension Data says it has sufficient cash resources to meet its existing commitments.
However, it says it has taken into account seasonal cash requirements and restrictions on cash in SA and Asia, as well as uncertain market conditions and a lack of operating visibility in key geographic markets.
"The subscription by VenFin will provide the group with greater flexibility in the management of its cash resources post the repayment of the existing convertible debentures at the year-end."
Investor relations manager Bronwyn Goeller says the bond issue saves the group from having to raise cash later if there is a sustained downturn.
"The opportunity came about, with the benefit of having a good shareholder, a long-term relationship and a cash buffer," she says.
The group says it had gross cash of $373 million at the end of September and free cash of $200 million after accounting for existing commitments.
Takeover target
Analysts have mixed views on the news. Some say VenFin`s subscription, with the recent announcement that Old Mutual, through its funds, now holds 20% of Dimension Data, may indicate an improvement in the market. It is also an indication that the market feels the share is still cheap.
"I think the share will stabilise at levels higher than at present, but I`m not sure the IT market has truly recovered. Demand is picking up but it`s still a bit shaky at this stage," one analyst said.
"VenFin has a bunch of clever guys who do their homework, so you have to assume they spent a lot of time looking at this."
He suggests that with recent speculation that Dimension Data may be a takeover target, the deal is also a way for the group to protect itself. "If there is a takeover attempt, VenFin will also have a say."
Goeller says with London Stock Exchange disclosure requirements, the group would be aware of any takeover attempt and there has been no such indication. The speculation was not a factor in the decision.
One analyst is concerned about the deal. "Raising debt is not a good endorsement by [Dimension Data] management," he comments.
Another analyst disagrees. "The company doesn`t have debt at the moment so gearing won`t be too much of a problem. On balance I would say it`s a positive thing for Dimension Data. It allays investor fears that in the event of another economic downturn it won`t be able to weather the storm.
"On the flip side, Dimension Data is recognising that in the short-term there is still uncertainty in some of its businesses."
While none of the analysts polled are willing to bet where the share price will go, they say the return of institutional buyers indicates a return of confidence in the share.
The share, which rose to 485c earlier today, was trading at 446c by late morning, up 26c or 6.19% from yesterday`s close.
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