How will the mandatory conversion feature and 6.375% coupon affect Bruker's cost of capital and equity dilution?
Impact on Cost of Capital
The 6.375 % coupon on the Series A mandatory convertible preferred is essentially a fixed‑rate financing charge of about $38 million per year on the $600 million proceeds (pre‑tax). Because the securities are “preferred” they sit senior to common equity in the capital hierarchy, so the coupon is a higher‑cost component than traditional senior debt would be (senior debt at comparable credit quality typically trades at 4‑5 %). However, the mandatory‑conversion feature means the instrument will ultimately become equity, which removes the coupon obligation once conversion occurs. In practice the effective cost of capital is a hybrid: investors price the preferred at a spread over the risk‑free rate plus a conversion premium. When you back‑out the tax shield, the after‑tax cost sits roughly in the 5‑5.5 % range—still higher than pure debt but lower than a straight equity raise at current market multiples.
Equity Dilution Consequences
Because conversion is mandatory, 100 % of the $600 million (plus up to an extra $90 million if the underwriters’ option is exercised) will be forced into common shares at a predetermined conversion ratio. Assuming a typical conversion price of roughly $70‑$75 per share (the level usually set to be at a modest premium to the pre‑offering price), the $600 million would translate into roughly 8‑9 million new common shares. That represents a dilution of 6‑7 % of the existing share count and will proportionally depress earnings‑per‑share (EPS) and book‑per‑share metrics once the conversion date arrives (often 3‑5 years after issuance). The optional $90 million adds a further 1‑1.5 % potential dilution, so investors should model a “worst‑case” fully‑diluted share count.
Trading Implications
- Short‑term: The cash infusion improves Bruker’s balance sheet, reduces leverage, and should bolster liquidity ratios—positive for the stock. Expect a modest price bump on the news, especially if the market perceives the conversion price as comfortably above current levels.
- Medium‑term: Monitor the announced conversion trigger (date and price). When the mandatory conversion window opens, the market will price in the impending supply of new shares. If the stock is near or below the conversion price, the dilution impact will be more pronounced, potentially pressuring the share price.
- Actionable: Consider a buy‑on‑dip if the stock pulls back below the conversion price after the offering close, betting that the balance‑sheet benefits outweigh the dilution. Conversely, if the stock trades well above the conversion price and the conversion window is near, a short‑term defensive position (e.g., put spreads) can capture the likely downward pressure from forced share issuance. Keep an eye on the underwriters’ $90 million option—if exercised, it adds a secondary dilution event that can be priced in ahead of time.