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Western EuropeMay 1 2012

Convertible bond feeds Dialog's growth story

A convertible bond enabled technology company Dialog to raise funds fast, while significantly broadening its investor base and keeping dilution within fixed limits.
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Dialog Semiconductor is a fast-growing technology company operating at the heart of the consumer electronics sector. The Anglo-German business designs, manufactures and sells semi-conductors that extend the battery life of smart phones, tablets and other seemingly indispensable electronic gadgets.

In September 2009, the group raised €60m via an equity fund-raising at €3.65 a share. Two years later, earnings were rising, the shares were trading at more than €13 and the company began thinking about a fresh fund-raising. “The equity issue in 2009 went really well but it took a lot of management time. There was a long prospectus and we went on a three- or four-day roadshow,” says Dialog chief executive Jalal Bagherli.

Keen to explore new ideas, Mr Bagherli started talking to a small coterie of banks towards the end of 2011. Markets were subdued across Europe but the group’s relationship bankers still felt there would be an appetite for Dialog paper. “Banks know we are a high-growth company so we get lots of calls offering lots of different solutions. But this time several bankers suggested the same thing – a convertible bond. We were told there was demand in the market and it was a good time to issue,” he says.

Convertibles are considered ideal for high-growth companies that generate plenty of cash and have strong prospects but do not benefit from a credit rating. Dialog fitted the bill nicely, particularly as it numbers Apple among its customers, an association almost guaranteed to arouse investor interest. “We had never issued a convertible before and we were not familiar with the process but all the bankers explained it was quick and easy given good market conditions, so we opted for this route,” says Mr Bagherli.

Appetite sharpens

Initial discussions began about six months ago and gathered momentum this year, as markets picked up and sentiment recovered. In 2010 and 2011, relatively few convertibles were launched and annual issuance almost halved to little more than €10bn. In the first quarter of 2012, however, investors regained an appetite for the asset type and in February 2012, Dialog decided to take its bankers at their word. Selecting Barclays Capital as sole bookrunner, it began the due diligence and documentation process.

“We had not used Barclays Capital before but the team impressed us in terms of their track record and their strong distribution platform. Also, we liked the team and they made us a competitive offer,” says Mr Bagherli.

Dialog chose to raise €201m in the convertible market, via a five-year issue, with a call option after three years. If fully converted, the issue will dilute Dialog’s share capital by 10%, so certain documentation had to be put in place to protect existing shareholders’ pre-emptive rights. “We had to do what is called a cash box placing, which allows you to issue up to 10% of the company’s share capital without requiring a full prospectus. It’s a common mechanism in the convertible market,” says Mr Bagherli.

Good timing

Once the documentation and due diligence were completed, Dialog was ready to go and the timing seemed to be in its favour as there was a shortage of convertible bond paper in the technology area.

The company was initially looking at a coupon of between 1.25% and 1.75% with a conversion premium in the range of 25% to 35%. At 7am on March 8, the transaction was launched in the market and later that same morning Dialog held a conference call with more than 30 institutional investors. The company’s story appealed and by lunchtime the books were substantially oversubscribed.

“We could not and had not planned to raise more than 10% of share capital, obviously, as that would have created too much potential dilution. But we tightened the coupon to 1% and held the conversion rate at 35%,” says Mr Bagherli.

At the time, the shares were trading at just over €16 and the conversion price was set at €22.367. Stocks frequently fall in the immediate aftermath of a convertible bond issue but Dialog shares actually rose. “We expected the share price to drop but it moved up 2% to 3% on the day and has held up since, so the market must be taking the issue very positively,” suggests Mr Bagherli.

The bonds were sold to almost 200 institutional investors. Two-thirds were long-only funds and the rest were hedge funds – traditional buyers of this type of paper. Encouragingly for Dialog, interest came not just from Europe but from Asia, too, broadening the company’s investor base.

“We have a good mix of top-tier institutional holders and we have some new investors on the register, whom we did not know before, which is always a good thing. The whole process has been very efficient and I have to say I am very happy with the deal,” says Mr Bagherli.

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