The notes will be listed on the Singapore Exchange and conversion of the notes will be settled with cash unless the issuer (Xero Investments Limited, a subsidiary) elects to settle the conversion with Xero issuing shares.
Goldman Sachs and Morgan Stanley will act as joint lead managers for the offering and there will be certain call option transactions with the brokers. There will also be a 'delta placement' of 1.2 million to 1.9 million shares to facilitate some of the hedging activity.
Xero said that cash outflow in FY19, being operating less investing cash flows, will be less than FY19. Excluding acquisitions Xero is managing the business to be cash flow break-even within the current cash balance, without drawing on debt or the note money. Management re-iterated profit will be re-invested for long-term growth.
Xero agreed with analyst consensus expectations (as at 19 July 2018) for revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) for FY19 prior to the Gusto strategic alliance, acquisition of Hubdoc and transition to new accounting standards. The expectations were revenue of between NZ$529 million to NZ$558 million and EBITDA of NZ$66 million to NZ$94 million.
This compares to operating revenue of NZ$406.6 million and EBITDA of NZ$26 million in FY18.
Steve Vamos, the CEO of Xero, said "Xero's focus on financial and operating discipline has meant the business is capable of continuing to fuel strong organic growth whilst ensuring a foundation for further strategic investments that will benefit shareholders, small business customers, and account, bookkeeping and ecosystem partners.
We see the additional financial flexibility provided by this offering as supporting the significant opportunity we have to enhance and extend Xero's small business platform and ecosystem capabilities through the pursuit of complementary targeted acquisitions."
It sounds like Xero is going to go on an acquisition spree with this money, perhaps in North America considering the currency it is being raised in. FY19 sounds like a bumper year with underlying EBITDA expected to, at minimum, more than double.
Xero is a great business. Long-term investors may benefit from making an investment at today's price, but I think there's a decent chance it could fall back over the next 12 months, which may present a better value opportunity.