Saudi expands strategic toolbox with Lenovo deal

Saudi expands strategic toolbox with Lenovo deal


Saudi expands strategic toolbox with Lenovo deal

Follow on
Follow us on Google News

HONG KONG (Reuters Breakingviews) - By the usual standards, Lenovo’s new debt deal doesn’t make much sense.

The $2 billion convertible bond, sold exclusively to a unit of Saudi Arabia’s Public Investment Fund, pays no interest and carries a conversion threshold of HK$10.42 per share which is already below the company’s current stock price. But the security cannot be exchanged for shares until just before it matures in 2027.

On the face of it, the laptop maker is getting the better end of the deal.

All the $18.8 billion company is handing over for three years is a seat on its board – and even that vanishes upon maturity if the debt isn’t swapped for stock. Meanwhile, Lenovo can use the proceeds to pay off debt that it does have to pay interest on, as well as to use for other purposes.

But the real meat of the deal lies in a separate but related agreement with its new investor, Alat, in which Lenovo has pledged to base its regional headquarters for the Middle East and Africa in Riyadh, as well as open up a new manufacturing facility in the kingdom. That fits squarely with the goals of Alat, which launched in February with the personal imprimatur of Mohammed bin Salman, the Saudi crown prince. The new company is meant to build partnerships that will help the country diversify its economy by building up capacity in advanced industries and electronics.

Lenovo, which has dual headquarters in China and the U.S., is a solid candidate for such a partnership. It has just come off a second straight quarter of revenue growth after a years-long slump, and its shares have risen two-thirds over the past 12 months.

The decision to opt for a convertible bond instead of a vanilla equity investment also shields Alat from a sell-off if global demand or geopolitical tensions send Lenovo’s shares tumbling. The laptop maker may appear on paper to have sealed a sweet deal, but Riyadh is the real winner.

Lenovo announced plans on May 29 to sell a $2 billion zero-coupon convertible bond to Alat, a unit of Saudi Arabia’s Public Investment Fund that aims to spur growth in the kingdom’s electronics sector.

Unusually for a convertible bond deal, the conversion price of HK$10.42 per share is below the stock’s current level.

In exchange for this interest-free funding, Lenovo has agreed to set up a regional headquarters and build a new factory in Saudi Arabia.

For more insights like these, click here, to try Breakingviews for free.