What happened

Shares of "experiences retailer" Groupon (GRPN -0.61%) closed Tuesday's trading session 8.4% lower, adding to the declines the stock took the previous day. In the end, both days' moves were driven by concerns about one thing.

So what

On Monday, Groupon announced it was going to issue convertible notes in a private placement so it could pay down debt that is scheduled to mature in 2022. The goal was to raise $200 million, with a buyer option to increase that sum to $230 million. Fears over the potential for shareholder dilution from the conversion of these notes into shares was likely what sent the stock price lower that day, even though the company only provided a broad outline of its intentions.  

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Image source: Getty Images.

On Tuesday, the market was likely reacting to the pricing of that transaction. The 2026 convertible notes will carry an interest rate of just 1.125%, which is pretty low, but they will convert into Groupon stock at a ratio of 14.68 shares per $1,000 of principal. That equates to a conversion price of roughly $68.12 per share, or about 40% above the current price of Groupon's stock. A bit of back-of-the-envelope math, meanwhile, shows that the conversion of these notes could add nearly 3 million shares to the company's issued and outstanding share count.

Now what

At the end of the fourth quarter, Groupon had roughly 39.1 million shares outstanding, which suggests a potential dilution of around 7.5%, assuming full conversion. It's totally reasonable that long-term investors would be worried about that, especially given that some view the company's business model with material skepticism