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Unique Convert Offering From Dendreon via JPMorgan


After the bell yesterday Dendreon announced a $500 million convertible debt offering run by JPMorgan. Those who read past the headline might notice the deal is a bit unusual.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

After the bell yesterday Dendreon (DNDN) announced a $500 million (+$75 million greenshoe) convertible debt offering run by JPMorgan (JPM). Those who read past the headline might have noticed the deal is a bit unusual. Before I describe it, a quick primer:

When a company issues convertible debt, the convertible arbitrage funds who buy it will short the stock in the open market. This pressures the stock price. The convert arb funds who buy the deal overnight want to hedge right away, so the pressure on the stock could be quite bad the trading day after the announcement. JPM structured this deal to try to eliminate that problem.

Any convert arb fund who wants in the deal and who wants to hedge agrees to do their hedge with JPM at a pre-negotiated price. JPM turns around and sells those shares to other buyers at a negotiated price. This keeps all the "normal" hedging/shorting off the regular market. The deal bidding and pricing -- which includes the convert terms, the hedge share price, and price funds will buy stock from JPM at -- all occurs while the deal was being marketed.

If everything works, the deal should prevent 6 million to 7 million short shares from hitting the bid/ask on Friday morning. Those shares still end up on the Nasdaq reported short interest, but the common shares (and existing DNDN shareholders) could escape the selling pressure normally accompanying a convertible debt offering.

If this works as expected, investors should see more of this structure.

I'll note that fast money traders often reflexively short convert deals because of how they normally work. In my opinion, we'll see some of that this morning. If I was in that business, I'd be cautious about shorting this one. Normally, you'd have the convert buyers as company. In this structure, you'll only have other opportunistic traders. That could result in a small short squeeze as these reflexive traders figure out too late this is a unique deal structure.

The deal, which sources tell me matures in 2016, also provides the right for DNDN to repay the debt in cash. If they do that, and they should have more than enough cash flow to do so by 2016 if Provenge sells as projected, there won't be any shareholder dilution from this deal.

See also Debate Over Dendreon's Provenge Coverage Is Settled for why investors no longer have to wait until March to feel confident buying Dendreon.
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