Mr. Market, you must chill. I do declare, if you keep getting all worked up over nothing, you're going to give yourself a heart attack.
On Thursday, through simultaneous filings with the Securities and Exchange Commission, ceramics specialist Ceradyne (NASDAQ:CRDN) announced its intent to raise cash to pay off a $111 million credit facility (a fancy name for debt), fund acquisitions, and generally fill its corporate war chest to the brim. To raise the cash, Ceradyne will float between 1.8 million and 2.1 million new shares of common stock -- at a price to be determined by Ceradyne and its advisors, including Citigroup (NYSE:C) and Wachovia (NYSE:WB) -- and between $100 million and $110 million in senior subordinated convertible notes (another fancy name for debt).
Net result: Debt will hold steady at about $110 million or so, and the company will reap as much as $91 million (before the investment banks take their cut) with which to buy up competitors, expand production, and so on. In addition, the company's share count will jump to anywhere from 26.5 million to 26.7 million, depending on whether the investment banks exercise none, some, or all of their 270,000-share overallotment options.
In other words, nothing much is happening. When a company replaces $110 million or so in one flavor of debt with $110 million in debt of another flavor, it's a non-event. And when a company whose share price has roughly doubled over the past six months decides to convert some of that equity into cash that it can use as it wishes, this is at worst a non-event and at best an excellent opportunity to reward existing shareholders by relieving new shareholders of their hard-earned cash.
Yes, I know that Friedman Billings Ramsey (NYSE:FBR) says that this share issuance "introduces too much dilution." And, yes, issuing all these new shares will increase Ceradyne's share count by about 8%. But so what? Pre-dilution, an owner of 100 shares of Ceradyne owned 0.0000040% of a company with $99 million in net debt. Post-dilution, that same owner will own .0000037% of a company with $8 million in net debt. The shareholder's percentage ownership decreases, but the value of the company owned increases, basically balancing out the equation.
It's really nothing to get worked up about, Ceradyne shareholders. And certainly not worth slicing $84 million off the company's market cap. So I repeat: Mr. Market, you must chill.
Why has Ceradyne doubled in six months? Read all about it in:
- Seeing the Obvious at Ceradyne
- Ceradyne Rock Solid: Fool by Numbers
- Ceradyne's Wild Ride
- What's Ceradyne Up To?
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Fool contributor Rich Smith does not own shares in any company named above.
