Mail.ru Group - Raising $600 mln in Cash

Mail.ru Group (MRG) yesterday announced plans to raise $600 mln in cash through a $400 mln convertible bond and a $200 mln capital increase (implying 3% dilution) to fund contingent liabilities of $143 mln, growth across existing verticals and new M&A. We were pleased to see that both Naspers and Tencent intend to participate in the placement. At end-2Q20, MRG's net debt/EBITDA stood at 1.1. MRG shareholders also approved the issuance of 5.5% of the current equity capital to fund incentive plans. We reiterate our BUY rating and target price of $35.76 per GDR. > Convertible bond offering for $400 mln. MRG announced that it will place $400 mln in senior unsecured convertible bonds due in 2025. The bonds will be offered with an annual interest rate between 1.375% and 1.875% payable semiannually and a conversion premium of 40% to 45% above the reference price, which will be the placement price of each MRG GDR in the concurrent capital raise (see below). The bonds are subject to a cash settlement option at the discretion of MRG. Bondholders will have the right to convert their bonds into GDRs at the prevailing conversion price starting on October 1, 2021. MRG can redeem the bonds at any time in two cases: first, on or after October 22, 2023 if the value of the GDRs deliverable upon conversion exceeds 130% of the principal amount of the bonds over a certain period; and second, if 15% or less of the aggregate principal amount of the bonds remains outstanding. MRG's net debt/EBITDA stood at 1.1 at end-2Q20. MRG gets around 30% of its revenues in hard currency, most from the gaming division, where the share of international revenues is around 70%. > Capital raise for $200 mln. MRG reported that both Naspers (27.6% economic stake and 12.3% voting stake) and Tencent (7.4% and 3.3%, respectively) indicated they intended to participate in the placement. At yesterday's close, the $200 mln placement implies around 3% dilution. > Use of proceeds. MRG indicated the funds would go to contingent liabilities of around $143 mln, including its remaining $82 mln contribution to the AliExpress Russia JV in October and up to R4.6 bln in KPI-based payments to the O2O JV over the next six months. On top of that, MRG wants to maintain flexibility to pursue strategic M&A opportunities, to fund development and organic growth across its verticals, and to be able to finance loans to companies in the group.> Issue of up to 5.5% of equity for incentive plans. MRG shareholders with at least 65% of votes approved the issuance of up to 12,150,000 new common shares at par value to Mail.ru Employee Benefit Trustees Limited for providing awards under the existing incentive plan and future plans for employees, directors, officers and consultants of the company and its subsidiaries. At yesterday's closing price, that translates into $372 mln, which is around the amount of EBITDA we expect Mail.ru Group to post for 2020.