Seagate Technology (STX) to Raise $500M via Senior Notes - Analyst Blog

Hard disk drive (HDD) manufacturer Seagate Technology plc (STX) is raising capital through the issuance of unsecured senior notes. The company raised its principal amount of $300 million with an interest rate of 5.75% convertible senior notes to $500 million. The notes are set to mature in 2034.

The notes will be issued by one of the indirect wholly-owned subsidiaries but guaranteed by Seagate. The notes will be issued to institutional investors through private placement and the offer will cease on Dec 2.

The raised amount (after deducting issue-related expenses) is estimated to be roughly $492 million. This will enable Seagate to increase fund availability and finance its continuing working capital requirements, capital expenditure, general corporate expenses; facilitate the repayment of its 6.8% senior notes (due in 2016) and also fund withdrawal of outstanding notes.

As of Oct 27, 2014, the company had total senior notes balance of $3.81 billion. The balance consists of $331 million 6.8% senior notes due Oct 2016, $800 million 3.75% senior notes due Nov 2018, $506 million 6.88% senior notes due May 2020, $172 million 7.0% senior notes due Nov 2021, $1.00 billion 4.75% senior notes due Jun 2023 and $1.00 billion 4.75% senior notes due Jan 2025. Following the recent issuance, the senior notes balance will go up by an additional $500 million.

Seagate exited the first quarter of fiscal 2015 with $2.19 billion in cash and cash equivalents. Also, the company generated $602 million from operating activities compared with $577 million in the previous quarter. This indicates good liquidity position of the company, which will boost lender confidence.

Seagate reported better-than-expected first-quarter fiscal 2015 results, with revenues and reported earnings per share increasing substantially year over year. Interest expense per share during the quarter came in at $0.16 per share. We are encouraged by Seagate's optimism regarding strong demand for high-capacity drives, growth in Exabytes shipments given data exchange growth in mobile and the cloud, and favorable pricing.

Also, Seagate is focusing more on the enterprise side, which is a key growth area in the information technology sector. Anticipating a potential acceleration in cloud deployments (due to exponential growth in data storage in the cloud), Seagate is investing heavily to deliver high-capacity storage devices that would support expansion of cloud infrastructure and cloud applications. We believe that this will boost margins and reduce Seagate's dependence on the PC market.

Additionally, synergies from acquisitions and product innovations continue to drive growth. The company's significant exposure to high-end corporate desktop and enterprise server markets also remains a positive. Nonetheless, competition from Western Digital Corp. (WDC) and SanDisk Corp. (SNDK) is a concern, going forward.

Currently, Seagate has a Zacks Rank #3 (Hold).

Investors can also consider another technology stock, Baidu, Inc. (BIDU) that has a Zacks Rank #2 (Buy).