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Qualcomm Says Show Me The Debt

As part of Activist Strategy here’s a look at how the Qualcomm is using debt to juice shareholder returns. Up to you whether this is a beastly capital returns story that the market is overlooking or is the shortsightedness of taking on debt to buy back shares burden the company down the road. 

The JANA Partners push to break up Qualcomm is well-known. The key is the potential split of the company, but the buyback will be the kingmaker for shareholders in the near-term.

Qualcomm has agreed to a $15B buyback - looking to do $10B within twelve months. JANA wants $15B done in 6 months. In a prospectus yesterday, Qualcomm put itself closer to that major buyback. In particular, it’s a A1/A+ rated eight-part senior unsecured offering to raise $10B.

The details - in case you care - two $2B tranches for 7 years (fixed at T plus 100) and 10 years (fixed T plus 120). The rest will a variety of 3 year for $1.25B fixed at T plus 50 and $250M of floatings at three-month Libor plus 27 bps and 30 years for $1.5B at fixed T plus 175.

We won’t go into the details of a potential spinoff, nor the various cost cutting opportunities since we’ve discussed that in the past. Qualcomm is a $115B market cap company and so mispricing in this part of the market are usually nil. Despite having a $10B to $15B capital return set up for the next year, and likely north of $20B over the next 24 months, the market really appears to be giving Qualcomm the proverbial finger - actually trading down YTD.

But, as we talked about before, using Panera and Stanley Druckenmiller as conversation starters, raising debt to buy back shares might just be one of the greatest can kicking tricks in several decades.

BWIQualcomm, Jana Partners