Key Takeaways
- United Microelectronics shares fell about 10% after the company priced a $1.8 billion zero-coupon convertible bond sale.
- The selloff looks much bigger than the dilution, which UMC puts at about 2.34% if every bond converts.
- The bonds pay no interest, and investors get back slightly less than they paid if they never convert.
- What to watch is how UMC spends the money, which it says will go to equipment and plant construction.
United Microelectronics (UMC) shares are down about 10% today after the Taiwanese chip foundry priced a $1.8 billion convertible bond sale. It filed the terms with the SEC at 9:27 a.m. ET, just before Monday’s open. (The S&P 500 is up today, so this one is all UMC.)
What exactly happened
UMC is selling two $900 million tranches of bonds. They pay no interest, and holders can swap them for new shares starting three months after the bonds are issued on Oct. 13:
- One tranche converts at NT$179.19 a share, 17.5% above Monday’s Taiwan close of NT$152.50.
- The other converts at NT$202.06, 32.5% above that close.
- One tranche matures in five years and the other in 18 months.
Here’s the fun part: if the bonds never convert, investors get back a little less than they paid. (The two tranches carry yields of -0.25% and -1.35% a year.) So UMC is getting paid to borrow.
Good gig if you can get it.
How much dilution are we talking about?
Not much. UMC says that if every bond converts, existing shareholders get diluted by about 2.34%. And that only happens if the stock climbs past those conversion prices.
It would still be the first real increase in years, since UMC’s diluted share count has barely moved since 2022…
So why the 10% drop? It’s wiped out over $5 billion of market value, more than three times the size of the whole deal. Some of the drop is probably mechanical, though this is speculation: people who buy convertibles often short the stock to hedge, which can weigh on the shares on the day a deal prices.
The balance sheet doesn’t need rescuing, either, so it’s not like there’s extensive known financial risk here:
What’s next
UMC says the money will go toward machinery, equipment and building new plant facilities. That points to a bigger capital spending budget, which can weigh on free cash flow until the new capacity fills up.
Still, for me, the market’s reaction looks overdone. UMC is borrowing for free(ish), and new shares only get issued if the stock rises well above where it is today.
Of course, if the shares don’t rise, UMC owes $900 million back in April 2028 on the short tranche. UMC’s next earnings report should show how big the spending plan really is.
But in the meantime…this seems like a very silly move by the market to me. You want companies to lock in debt at a low cost of capital!
So what is UMC stock actually worth?
TIKR lets you forecast the future price of any stock in less than a minute. Just enter a few assumptions into TIKR’s valuation model and see what UMC could be worth. Start from Wall Street consensus estimates, or adjust the inputs to reflect your own view of the business. It’s free to use.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
