Shares of Fluor (NYSE:FLR), a large engineering and construction company, fell sharply at the open on May 13, losing roughly 11% of their value in the first few minutes of trading. The news likely driving this decline came out after the close on May 12. Clearly investors didn't like what they read.
Fluor announced yesterday that it intends to sell a cumulative perpetual convertible preferred stock with a face value of $1,000 per share. The proceeds are expected to be used to repay other debt. The plan is to issue 450,000 shares in a private placement, with the initial purchasers being granted the option of adding another 67,500 shares to that figure. The company can not redeem these preferred shares, but it can force conversion under certain circumstances. Buyers can convert the preferred shares into stock at any time.
The pricing of the proposed deal hasn't been released yet, so the interest rate and conversion rate are still to be determined. However, the convertible feature here suggests that Fluor's share count could head higher, which means dilution for current shareholders. Investors tend to frown on anything that would dilute their stake in a company, so the sell-off makes sense in broad terms. That said, until the terms are actually released there's no way to actually quantify the impact this security will have.
Although the price action today is not irrational, long-term investors should probably take a balanced view here, at least until more is known. It is certainly not good that a convertible preferred stock might cause dilution. However, if the interest rate is compelling, the benefit of debt reduction and the drop in interest expense might be worth it over the long haul. It's probably best to view today's early price decline as noise while awaiting more details of this offering. Indeed, at this point much of the bad news may already be reflected in the stock price.