Shares of Groupon (GRPN -3.59%) fell roughly 10% as Wall Street trading got under way on March 22. The drop was most likely related to a financing transaction, which investors obviously viewed in a less than positive light even though there are some positives here.
Before the market opened, Groupon, which describes itself as an "experiences retailer," announced it was issuing $200 million worth of convertible senior notes due 2026 in a private placement to institutional investors. Those investors can increase that by another $30 million if they'd like. The proceeds are expected to be used to pay down debt that comes due in 2022.
On one very important level, this is a good move for Groupon's balance sheet since it pushes out an upcoming maturity. It's worth noting that impairment charges in 2020 left the company with a huge $10 per share loss for the year and materially reduced shareholders' equity. Balance sheet strength is something worth monitoring here, noting that revenue also declined a huge 36% year over year in 2020. That said, investors are likely concerned that the convertible note could lead to shareholder dilution down the road, if the notes are converted into stock. That wouldn't be a positive and stock investors are probably justified in worrying a little bit about that possibility despite the benefit of pushing out maturities.
A key part of Groupon's business is connecting consumers to retailers and restaurants. The coronavirus pandemic was a major headwind in 2020, as the revenue decline and asset writedowns show. Buying time to turn the business around (a business that some consider fundamentally flawed) is, for better or worse, a good call and this convertible issuance helps in that regard. Long-term investors who believe Groupon can get the business growing again should probably appreciate that, even if there's a potential cost in the form of dilution.