Twitter Inc. (NYSE: TWTR) has had an incredible week. On top of scoring multiple analyst upgrades, Twitter raised much more than expected in its convertible debt offering — to the tune of $1.8 billion. The terms of the offering were also cheap enough that they would leave many value investors scratching their heads over how the company could land such cheap financing.

The analysts liked Twitter even before a debt financing priced. Twitter was started as Buy with a $62 price target at Canaccord Genuity, and it was raised to Buy from Neutral by UBS with its price target raised to $65 from $50.

The big news is that Twitter’s $1.8 billion convertible debt offering was larger than the $1.3 billion and $1.5 billion that had been discussed before the formal pricing and demand. Twitter’s first $900 million aggregate principal amount of convertible senior notes are due in 2019, and the second $900 million tranche of convertible senior notes are due in 2021.

What is amazing is that the coupon on the five-year note is only 0.25%, and the coupon on the seven-year note was 1%. The notes that were sold will be senior and unsecured obligations of Twitter. Twitter has to pay out only $11.25 million in annual interest for this $1.8 billion in capital raised, and the conversion price is handily above the current share price. If this is not a major score for Twitter, nothing else is either.

READ ALSO: Do CEOs Use Social Media?

The sale of the notes to the initial purchasers is expected to settle on September 17, and it is expected to result in approximately $1.77 billion in net proceeds to the company. Twitter has even granted the initial purchasers of the notes a 30-day overallotment option valued at $200 million. This option allows for a purchase of up to an additional $100 million aggregate principal amount from both the 2019 and 2021 notes.

Twitter expects to use approximately $112.3 million of the net proceeds of the note offering to pay the cost of the convertible note hedge transactions. The real speculation for the offering is that Twitter is raising capital to make cash and stock acquisitions that would otherwise perhaps be too dilutive to what is already a very expensive stock.

Twitter is one of those super-high valuation stocks that just don’t make sense to traditional value investors — it is valued at more than 140 times expected 2015 earnings and more than 20 times expected 2015 revenues. Those valuations may be off the chart, but it seems almost impossible not to see that Twitter just scored a major coup with a large financing at terms that dirt cheap to the company.

The initial conversion rates for both the 2019 notes and the 2021 notes is at 12.8793 shares of common stock per $1,000 principal amount of notes. This generates an initial conversion price of approximately $77.64 per share for each tranche. These are roughly 50% premiums to the share price, for a stock that has astronomically high valuations.

READ ALSO: Is YouTube Worth More Than Twitter?

The conversion terms were stated as follows by Twitter’s filing:

Prior to the close of business on the business day immediately preceding March 15, 2019, in the case of the 2019 notes, and March 15, 2021, in the case of the 2021 notes, the notes will be convertible at the option of the note holders only upon the satisfaction of specified conditions and during certain periods. Thereafter until the close of business on the second scheduled trading day preceding the relevant maturity date, the notes will be convertible at the option of the noteholders at any time regardless of these conditions. Conversions of the notes will be settled in cash, shares of Twitter’s common stock or a combination thereof, at Twitter’s election.

In connection with the pricing of the notes, Twitter has also entered into privately negotiated convertible note hedge transactions. This is not uncommon at all in a convertible note offering. Still, many investors feel that these can create a collar on a stock. Twitter stated in its filing:

Twitter’s common stock upon any conversion of notes and/or offset the cash payments Twitter is required to make in excess of the principal amount of converted notes of a series, as the case may be, in the event that the market price of Twitter’s common stock is greater than the strike price of the convertible note hedge transactions, which initially corresponds to the initial conversion price of the notes of that series. Twitter also entered into privately negotiated warrant transactions with the hedge counterparties. The warrant transactions will separately have a dilutive effect to the extent the market value per share of Twitter’s common stock exceeds the strike price of any warrant transactions, unless Twitter elects, subject to certain conditions, to settle the warrant transactions in cash. The strike price of the warrant transactions will initially be approximately $105.28 per share, which represents a premium of approximately 100% over the last reported sale price of Twitter’s common stock on September 11, 2014, and is subject to certain adjustments under the terms of the warrant transactions. If the initial purchasers exercise their over-allotment option to purchase additional notes of a series, Twitter intends to enter into additional convertible note hedge transactions and additional warrant transactions with the hedge counterparties.

Twitter shares were trading at $52.70 in the early hours on Friday, versus a post-IPO range (not quite 52-weeks yet) of $29.51 to $74.73. Twitter’s market cap is close to $32 billion, and the consensus analyst price target for the stock is roughly $53.

READ ALSO: Customer Service Hall of Fame

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.