Lenovo Forges Saudi Alliance With $2 Billion Convertibles Issue

(Bloomberg) — Lenovo Group Ltd. plans to sell $2 billion worth of zero-coupon convertible bonds to Saudi Arabia’s sovereign wealth fund, part of a broader strategic pact with the tech-hungry kingdom.

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Lenovo said it will issue bonds to Alat, an investment firm backed by the Public Investment Fund, at an initial conversion price of HK$10.42 per share. That’s a roughly 12% discount to Lenovo shares’ closing price the previous day, near a nine-year-high for the stock. Lenovo’s shares fell 4.2% Wednesday morning.

As part of the agreement, the Beijing-based maker of PCs and artificial intelligence servers plans to build a research and development center in Riyadh and expand production capacity in the region.

“The convertible bonds sale is done together with an agreement with the Saudis for Lenovo to expand their business in Middle East,” said Vey-Sern Ling, managing director at Union Bancaire Privee. “So it’s giving up a 12% stake eventually, getting funding now, and getting strategic help.”

Upon maturity, the converted notes would represent about 12% of Lenovo’s current capital, or near 11% of the enlarged capital once the conversion happens.

Over the last decade, the PIF has been beefing up its investments in Asian tech firms, most recently setting up a $100 billion AI and chips fund. The PIF, which is one of the largest investors in Japan’s Nintendo Co., has announced a partnership with a Chinese surveillance equipment maker and is in talks to back the payments startup Airwallex.

The PIF’s talks with Chinese firms are drawing scrutiny from the US, which sees the Middle East as a possible conduit of technology from the US to China. The head of Alat said this month the country would divest from China if it were asked to do so by the US.

Separately, Lenovo said it’s proposed issuing 1.15 billion three-year warrants at a price of HK$1.43 each to raise additional funds. That issue will be under a specific mandate, it said in a filing.

Lenovo is the latest Chinese tech firm to seek funding via a convertible issue within a matter of days. It pushes the amount of money raised by Asian firms through the instrument this month to about $9 billion, considering notes denominated in US dollars, according to data compiled by Bloomberg. That’s the highest monthly tally on record, the data show.

Convertibles are popular during times of higher borrowing costs because the hybrid notes’ equity component typically means interest rate payments are lower than regular debt. They allow companies to borrow at lower rates than regular debt — in some cases for free.

The notes also give investors the chance to profit from a rise in the underlying share price, which is attractive in volatile markets.

What Bloomberg Intelligence Says:

Lenovo’s proposed $2 billion convertible bond (CB) issuance to Saudi Arabia’s sovereign wealth fund offers inexpensive funding for expanding into the Middle East and Africa. It plans to build a new PC and server manufacturing facility in the Kingdom of Saudi Arabia. The new CB has a zero-percent coupon while its 3-year straight bond yield is around 5.8%.

-Cecilia Chan, Bloomberg Intelligence

Alibaba Group Holding Ltd. last week sold $4.5 billion in debt that can be turned into equity, a record for convertibles denominated in dollars by an Asian company, with part of the proceeds to be used to buy back shares. That came just days after rival online retailer JD.com Inc. sold a total of about $2 billion of such notes.

Lenovo reported its third straight quarter of net income on a recovery in PC sales and booming investment in servers and other networking equipment to support artificial intelligence. But it logged an operating loss on a shortage in supplies of AI accelerators.

–With assistance from Shikhar Balwani and Andrew Monahan.

(Updates with share reaction and analyst commentary)

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