Oracle Corp. (ORCL) announced to issue notes in two parts comprising $1.0 billion in 10-year notes and $2.25 billion in 30-year bonds. The sell offer is expected to close on Jul 19, 2010.
The $1.0 billion carries an interest rate of 3.875%, and due on 2020. The $2.25 billion carries an interest rate of 5.375%, and due on 2040. Interests on both the notes are payable semi-annually on Jan 15 and Jul 15, with the first payment being on Jan 15, 2011.
According to IFR, Bank of America Merrill Lynch, BNP Paribas (BNPQY) and JP Morgan (JPM) are the joint lead managers of the sale. Moody’s Investors Service, Fitch and Standard & Poor’s have assigned a rating of “A2″, “A” and “A”, respectively, to the notes.
Oracle expects to use the net proceeds to primarily pay off its 5.0% senior notes due January 2011. Oracle repaid $1.0 billion of its floating rate senior notes in May 2010. Oracle will likely use a part of the net proceeds to improve its cash position.
Moreover, Oracle is also keen to use the funds for new acquisitions in the future. Much of Oracle’s growth has come from acquisition.
Oracle had $18.5 billion in cash and equivalents at the end of May 31, 2010 versus $17.5 billion in the previous quarter.
Oracle’s notes payable, current and other current borrowings (short-term debt) increased in fiscal year 2010 primarily due to the reclassification of $2.2 billion of senior notes due January 2011 as a current liability and outstanding commercial paper notes of $881 million, partially offset by the repayment of $1.0 billion of senior notes that matured in May 2010.
Oracle’s long term debt at the end of May 31, 2010 was $11.5 billion in line with the previous quarter. Total debt to capital ratio was 31.9%.
At the end of May 31, 2009, Oracle’s earnings to fixed charges ratio was 13X, down from 18X reported in 2008. This implies that the company earnings are insufficient to cover the interest obligations. We believe use of debt in acquiring companies will further hurt this ratio going forward.
Oracle faces stiff competition from Hewlett-Packard (HPQ), Cisco Systems (CSCO), EMC Corp. (EMC), SAP AG (SAP) in addition to its largest rival International Business Machines Corp. (IBM).
Remain Neutral
We maintain a Neutral rating on a long-term basis based on Oracle’s longer-term growth prospects. We believe a strong product pipeline, incremental cost savings, robust cash flow, improved margin and incremental benefits from Sun acquisition will drive Oracle’s growth going forward.
Currently Oracle’s shares reflect the integration related risks associated with Sun’s acquisition.
According to the Zacks Consensus, earnings per share are expected to increase 15.2% year-over-year to $1.83 for full year 2011 and 13.1% year-over-year to $2.07 for full year 2012.
Oracle has a Zacks Rank #3, which implies a Hold rating on a short-term basis.
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