The Xero Ltd (ASX: XRO) share price was temporarily halted from trading on Wednesday morning, leaving investors wondering about the reasons behind the pause.
Convertible Notes Offering
Xero announced a significant development—a convertible notes offering, which prompted the trading halt. The company initiated an offering of US$850 million (approximately AU$1.3 billion) fixed coupon guaranteed senior unsecured convertible notes due in 2031. These notes will be issued by Xero's wholly owned subsidiary, Xero Investments, and guaranteed by the parent company.
The intended listing of these notes on the official list of the Singapore Exchange Securities Trading indicates Xero's strategic financial move. Notably, the conversion of these notes will be cash settled unless Xero elects to physically settle the conversion by issuing ordinary shares to the relevant noteholders.
Utilization of Proceeds
The net proceeds from the offering, after accounting for various expenses, will serve several purposes. Xero plans to utilize these funds for repurchasing its existing notes, potential acquisitions and strategic investments, and general corporate purposes.
Regarding the repurchase of existing notes, Xero disclosed its intention to conduct a reverse bookbuilding process for the US$700 million zero coupon guaranteed convertible notes due in 2025. This process aims to gauge interest from existing note holders willing to sell in exchange for cash. Additionally, Xero may continue to repurchase any remaining existing notes on the market.
In terms of potential acquisitions and strategic investments, Xero has not disclosed specific deals but intends to remain prepared to capitalize on opportunities as they arise.
CFO's Perspective
Kirsty Godfrey-Billy, Xero's chief financial officer, emphasized the significance of maintaining a robust balance sheet and the financial flexibility derived from the convertible notes offering. She stated, "We're pleased with how we are managing our strong balance sheet and the optionality this provides. The announced offering will provide us with financial flexibility as we continue to execute our strategic priorities."
Analyst Perspective
Despite the trading pause, Macquarie, a leading brokerage firm, remains bullish on Xero's prospects. The firm reiterated an outperform rating on Xero shares, setting a price target of AU$180.70. This forecast suggests a potential upside of 37% for investors over the next 12 months, based on yesterday's closing price.