In a strategic financial move, Ziff Davis, Inc., a leader in technology, gaming, and cybersecurity media, has entered into a significant transaction involving the exchange of its existing convertible senior notes for new ones. On Tuesday, the company announced the issuance of $263 million in new 3.625% Convertible Senior Notes due in 2028, replacing $400.9 million of its 1.75% Convertible Senior Notes due 2026.
The exchange was carried out through private negotiations with certain note holders and also included a cash payment of approximately $135 million for the exchanged notes, along with the accrued interest up to the closing date. This financial reshuffling is aimed at managing the company's debt more effectively.
The newly issued 2028 Notes will pay interest semi-annually and are set to mature on March 1, 2028, unless they are converted or repurchased earlier. Note holders have the option to convert their notes into cash, Ziff Davis common stock, or a combination thereof, depending on the company's preference.
Conversion of these notes can occur under several conditions, including specific price thresholds of the company's common stock and certain corporate events as outlined in the governing indenture. The initial conversion rate is set at 10 shares per $1,000 principal amount of the 2028 Notes, which is subject to adjustment in case of particular events.
The 2028 Notes are senior, unsecured obligations of Ziff Davis, ranking equally with any future senior unsecured debt. They are superior to any potential subordinated debt but are subordinate to any secured debt to the extent of the collateral's value. Additionally, the notes are structurally subordinate to the liabilities of the company's subsidiaries.
Ziff Davis has structured the notes to potentially issue up to 2,631,470 shares of common stock upon conversion, based on the initial conversion rate. The issuance of the 2028 Notes and any common stock upon conversion will be carried out in compliance with the Securities Act, specifically Section 4(a)(2) for the notes and Section 3(a)(9) for the common stock.
In other recent news, Ziff Davis, the digital media and internet company, has announced a debt restructuring plan. The company has reached agreements to exchange around $401 million of its convertible senior notes due in 2026 for new notes and cash. The existing notes will be traded for approximately $263 million in new 3.625% convertible senior notes due in 2028, along with about $135 million in cash. Following this exchange, the outstanding principal amount of the existing notes will be reduced to around $149 million.
In addition to the debt restructuring, Ziff Davis has reported a 2.4% increase in its first quarter revenue for 2024, reaching $314.5 million. This is a significant development after six quarters of flat or declining numbers. The company's subscription and licensing revenues have become a key part of its income, accounting for 42% of total revenues. Adjusted EBITDA and adjusted diluted EPS have grown by 6.8% and 15.5% respectively.
Ziff Davis is also actively exploring merger and acquisition opportunities and plans to resume stock repurchases in the second quarter. Despite facing challenges in the shopping business, the company has shown growth in several sectors including technology, gaming and entertainment, and cybersecurity. Ziff Davis is focusing on enhancing ad targeting and performance using AI and remains optimistic about managing and improving the shopping category in the second half of the year.
InvestingPro Insights
Ziff Davis, Inc.'s financial reshuffling through the exchange of convertible notes is a strategic step that aligns with the company's impressive gross profit margins and expectations of net income growth this year. With a strong gross profit margin of 85.52% over the last twelve months as of Q1 2024, Ziff Davis's ability to generate income from its revenues remains robust. Additionally, the company's stock is trading at a low P/E ratio relative to near-term earnings growth, currently at 20.77, which may attract investors looking for value opportunities.
From an operational standpoint, Ziff Davis is in a healthy financial position with liquid assets that exceed short-term obligations, ensuring the company can meet its immediate liabilities. This is further supported by the fact that its cash flows can sufficiently cover interest payments, a reassuring sign for note holders and potential investors. It's worth noting that while the stock has experienced a downturn over the last month with a one-month price total return of -12.59%, analysts predict the company will be profitable this year, which could signal a potential turnaround for investors with a longer-term perspective.
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