The Motley Fool

Xero Limited (ASX:XRO) reveals US$300 million convertible notes offering and trading update

After the market had closed, Xero Limited (ASX: XRO) announced that it is launching an offering of US$300 million of guaranteed senior unsecured convertible notes due 2023.

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.

Trading update

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.”

Foolish takeaway

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.

If you’re looking for a high-flying growth share it might be better to go for this hotshot ASX tech stock.

Top Australian Stock Picker Just Issued Rare “Double Down” Buy Alert

Discover why this legendary Australian stock-picker just issued a “Double Down” buy alert to his exclusive group of insiders… and why he’s convinced this might be the single most attractive entry point for years to come.

Simply click here to get started and access our secure sign-up page.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

5 ASX Stocks for Building Wealth After 50

I just read that Warren Buffett, the world’s best investor, made over 99% of his massive fortune after his 50th birthday.

It just goes to show you… it’s never too late to start securing your financial future.

And Motley Fool Chief Investment Advisor Scott Phillips just released a brand-new report that reveals five of our favourite ASX stocks for building wealth after 50.

– Each company boasts strong growth prospects over the next 3 to 5 years…

– Most importantly each pays a generous dividend, fully franked.

Simply click here to find out how you can claim your FREE copy of “5 ASX Stocks for Building Wealth After 50.”

See the stocks now