Morning Commentary: Freshpet convertible offering eyed amid shareholder opposition

By Abigail W. Adams

Portland, Me., March 15 – The convertibles primary market broke its silence after SVB Financial Group’s failed capital raise with one new offering on deck.

Freshpet Inc. plans to price $350 million of five-year convertible notes after the market close on Wednesday.

The deal looked attractive based on underwriter assumptions with some sources calling it a buy.

However, the offering was met with backlash from Freshpet shareholders and was in the market amid fresh turmoil in the banking sector.

Equity and credit markets saw a fresh round of selling after headlines regarding Credit Suisse again shook investor confidence in the banking sector.

However, the latest Producer Price Index report, which indicated a faster rate of disinflation than previously anticipated, helped bolster market bets for rate cuts by the end of 2023.

Equity indexes were deep in the red early Wednesday with the Dow Jones industrial average down 513 points, or 1.58%, the S&P 500 index down 1.43%, the Nasdaq Composite index down 1.06% and the Russell 2000 index down 2.79% shortly before 11 a.m. ET.

Treasuries skyrocketed with the two-year Treasury yield down 42 bps to 3.829% and the 10-year yield down 25 bps to 3.436% shortly before 11 a.m. ET.

Freshpet eyed

Freshpet plans to price $350 million of five-year convertible notes after the market close on Wednesday with price talk for a coupon of 2.5% to 3% and an initial conversion premium of 27.5% to 32.5%.

The deal was heard to be in the market with assumptions of 650 basis points over SOFR and a 42% vol., according to a market source.

Using those assumptions, the deal looked about 2.5 points cheap at the midpoint of talk.

The offering launched post-close on Tuesday with markets appearing to stabilize from the shockwaves of SVB’s collapse.

Markets appeared to be back to business as usual with the deal expected to play to strong demand.

“It’s not a financial. It should do fine,” a source said.

While stock was off 9% in aftermarket trade following the deal’s launch, the pet food company had a market cap of $2.39 billion, which far eclipsed the capital raise and was from a sector largely insulated from the chaos in the financial sector, another source said.

However, the offering sparked ire from Freshpet shareholders with JANA Partners issuing a statement in opposition to the convertible notes offering.

JANA Partners called the decision to launch an equity-linked capital raise “baffling,” with the company recently assuring stockholders that it would not issue equity because the company felt its stock price was undervalued.

The conversion premium range of 27.5% to 32.5% represents the price of the company’s stock at the time it claimed its stock price was too cheap, according to the press release.

“This decision is the latest failure by Freshpet’s board at a time when it could ill afford further damage to its credibility,” JANA Partners said in the press release. “We believe Freshpet requires either significant board change, or in the absence of such change, should be sold.”

Proceeds from the offering were to be used to expand their manufacturing capacity, “so the rationale for raising capital appears sensible,” a source said.

While JANA Partners’ opposition might temper some interest, demand for the deal still appeared to be strong.

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