Kathy Schick and Bill Feingold
LinkedIn’s blend of big market capitalization, volatility, growth, and solid financials all contribute to one of the best HOCS (Hillside Overall Convertible Score) ratings we have seen for a new deal. At the price-talk midpoints, the deal gets a HOCS array of 76 Overall/71 Growth/87 Safety. These are strong numbers despite the mediocre optics.
The deal rates more strongly in our approach than it does in traditional models, which seem to make the bond a borderline buy. Who is right? Only time will tell.
LinkedIn is the world's largest professional network on the Internet. As of 3Q14 it had 332mm members located in more than 200 countries and territories. The company operates in three business segments: (1) Talent Solutions which provides recruiter products and job postings; (2) Marketing Solutions which provides ads to the website; and (3) Premium Subscriptions which provides additional online services to members.
LinkedIn is issuing $1.15bn of convertible senior notes due 2019. Proceeds will be used for a convertible notes hedge and warrants transaction and for general corporate purposes. The company is opportunistically raising capital on very attractive terms. Prior to the offering, cash balances were $2.264bn bolstered by a $1.3bn follow on stock offering in 2013. Pro-forma for the deal the cash balance will be $3.4bn. The company does generate positive free cash flow with $158mm generated over the latest twelve months. The new convertible bonds will be the only debt outstanding. Leverage (debt/LTM EBITDA) is a modest 2.2x based upon LTM EBITDA of $524mm.
The company announced 3Q14 earnings last Thursday. It continues to experience strong growth with revenue up 45% in the third quarter year-over-year with all three business segments participating. Talent solutions accounted for 61% of revenue for the quarter, followed by premium solutions at 20% and marketing solutions at 19%. Management has indicated it plans to continue expanding their product offerings and their international presence. Sales in the EMEA regions (Europe, Middle East and Africa) grew by 55% year-over-year and in the Asia-Pacific region by 60%.
LinkedIn has been using some cash for small acquisitions. So far in 2014 it has acquired six companies for $221mm in cash (plus some additional stock). Bizo, a social advertising program company, was acquired in August for $154mm of cash. Bright, a San Francisco-based online job board, was acquired in February for $51mm cash plus $50mm stock. The other four transactions were very small and totaled $16mm cash plus $7mm stock.
The company is well positioned to fund additional growth initiatives and make additional tuck-in acquisitions.