(Bloomberg) — Lenovo Group Ltd. plans to sell $2 billion in zero-coupon convertible bonds to Saudi Arabia’s sovereign wealth fund, part of a broader strategic pact with the tech-hungry kingdom.
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Lenovo said it will issue bonds to Alat, an investment company backed by the Public Investment Fund, at an initial conversion price of HK$10.42 per share. That represents a discount of about 12% to Lenovo’s closing share price the previous day, near a nine-year high for the stock. Lenovo shares fell 4.2% on Wednesday morning.
As part of the deal, the Beijing-based maker of PCs and artificial intelligence servers plans to build a research and development center in Riyadh and expand production capacity in the region.
“The convertible bond sale is in conjunction with an agreement with the Saudis for Lenovo to expand its business in the Middle East,” said Vey-Sern Ling, managing director of Union Bancaire Privee. “So we will end up giving up a 12% stake, getting financing now and getting strategic help.”
At maturity, the converted notes would represent about 12% of Lenovo’s current capital, or close to 11% of the expanded capital once the conversion takes place.
Over the last decade, the PIF has reinforced its investments in Asian technology companies, most recently establishing a US$100 billion AI and chip fund. PIF, which is one of the biggest investors in Japan’s Nintendo Co., announced a partnership with a Chinese surveillance equipment maker and is in talks to back payments startup Airwallex.
The PIF’s talks with Chinese companies are attracting scrutiny from the US, which sees the Middle East as a possible conduit for US technology to China. The head of Alat said this month that the country would divest from China if asked to do so by the US.
Separately, Lenovo said it proposed issuing 1.15 billion three-year warrants priced at HK$1.43 each to raise additional funds. This issue will be under a specific mandate, it said in a document.
Lenovo is the latest Chinese technology company to seek financing through a convertible issue in a matter of days. That brings the amount of money raised by Asian companies through the instrument this month to about $9 billion, considering U.S. dollar-denominated notes, according to data compiled by Bloomberg. That’s the highest monthly count on record, the data shows.
Convertibles are popular in periods of higher borrowing costs because the equity component of hybrid notes typically means that interest rate payments are lower than regular debt. They allow businesses to borrow at lower rates than normal debt – in some cases, for free.
The notes also give investors the opportunity to profit from a rise in the price of the underlying shares, which is attractive in volatile markets.
What Bloomberg Intelligence says:
Lenovo’s proposed $2 billion convertible bond (CB) issue to Saudi Arabia’s sovereign wealth fund offers cheap financing for expansion in the Middle East and Africa. It plans to build a new PC and server factory in the Kingdom of Saudi Arabia. The new BC has a zero percent coupon, while the yield on 3-year straight bonds is around 5.8%.
-Cecilia Chan, Bloomberg Intelligence
Alibaba Group Holding Ltd. last week sold $4.5 billion in debt that can be turned into equity, a record for a dollar-denominated convertible bond by an Asian company, with some of the proceeds used to buy back shares. This came just days after rival online retailer JD.com Inc. sold a total of about $2 billion of the notes.
Lenovo reported its third consecutive quarter of net profit due to a recovery in PC sales and growing investment in servers and other networking equipment to support artificial intelligence. But it recorded an operational loss due to supply shortages of AI accelerators.
–With assistance from Shikhar Balwani and Andrew Monahan.
(Updates with shared reaction and analyst comments)
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