UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
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MENTOR GRAPHICS CORPORATION | ||||
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 Convertible
Debenture Analysis
April 2011 |
 Important
Information On March 31, 2011, the company filed a definitive proxy statement
with the Securities and Exchange Commission (the “SEC”) in
connection with the company’s upcoming 2011 annual meeting of
shareholders. Shareholders are advised to read the company’s
definitive proxy statement, and any other relevant documents filed by
the company with the SEC, before making any voting or investment
decision because they contain important information. The definitive
proxy statement is, and any other relevant documents and other
material filed with the SEC concerning the company will be, when
filed,
available
free
of
charge
at
http://www.sec.gov
and
http://www.mentor.com/company/investor_relations. In addition, copies
of the proxy materials may be requested from the company’s proxy solicitor,
MacKenzie Partners, Inc., by telephone at 1-800-322- 2885
or
by
email
at
proxy@mackenziepartners.com. |
 Forward-Looking
Statements This presentation and commentary may contain “forward-looking”
statements based on current expectations within the meaning of the Securities Exchange
Act of 1934. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance or
achievements of the Company or industry results to be materially different from any
results, performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: (i) weakness or recession
in the US, EU, Japan or other economies; (ii) the Company’s ability to successfully
offer products and services that compete in the highly competitive EDA industry; (iii)
product bundling or discounting of products and services by competitors, which could
force the Company to lower its prices or offer other more favorable terms to customers; (iv)
possible delayed or canceled customer orders, a loss of key personnel or other consequences
resulting from the business disruption and uncertainty of prolonged proxy fights, offers
to purchase the Company’s securities or other actions of activist shareholders; (v)
effects of the increasing volatility of foreign currency fluctuations on the
Company’s business and operating results; (vi) changes in accounting or reporting rules
or interpretations; (vii) the impact of tax audits by the IRS or other taxing authorities, or
changes in the tax laws, regulations or enforcement practices where the Company does
business; (viii) effects of unanticipated shifts in product mix on gross margin; and
(ix) effects of customer seasonal purchasing patterns and the timing of significant
orders, which may negatively or positively impact the Company’s quarterly results
of operations, all as may be discussed in more detail under the heading “Risk Factors” in
the Company’s most recent Form 10-K or Form 10-Q. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. In addition, statements regarding guidance do not
reflect potential impacts of mergers or acquisitions that have not been announced or
closed as of the time the statements are made. The Company disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to any of the
forward-looking statements to reflect future events or developments.
|
 Mentor
Graphics’ new 4.00% debentures are favorable relative to the old 6.25%
debentures The make whole provision is consistent with market practice and the 6.25%
debentures, and will not be a material impediment to any premium transaction
– in fact, at Icahn’s $17 per share proposal, the make
whole would only reduce transaction value to shareholders by 1.24%
Mentor Graphics eliminated the proxy fight change-in-control put provision that is
common in many convertible debt issues, including our old 6.25% debentures
Mentor Graphics’
Board took the course of action that it determined was in the best interests of all
shareholders by pursuing a prudent refinancing
The proceeds from the new 4.00% debentures will be used to refinance the old 6.25% debentures,
to repurchase $25MM of outstanding common stock at $14.67, the closing price on
29-Mar-2011, and to repay $18.5MM of term loan due 2013
Mentor Graphics’
New Convertible Debt is an
Improvement Over the Outstanding Debt
1
New
Debentures
Old
Debentures
Which is
Better?
Size (Principal, $MM)
$
253
$ 196 (1)
Seniority
Subordinated
Subordinated
Same
Coupon
4.00%
6.25%
New
Conversion Price
$
20.54
$
17.97
New
Illustrative Shares Underlying (2) -- Net of Repurchase (MM) (3)
10.613
10.907
New
Put Date
April 2018
March 2013
New
Proxy Fight Change-in-Control Put
No
Yes
New
Stock Change-of-Control Make Whole
No
No
Same
Cash Change-of-Control Make Whole
Yes
Yes (but lapsed in 2011)
Old
Source: Mentor Graphics 10-K dated 31-Jan-2011, Mentor Graphics indentures for
Convertible Subordinated Debentures due 2026 and 2031, Mentor Graphics management (1) Does
not include $18.5MM of term loan that will be retired with net proceeds from the sale of the 4.00% debentures
(2) For comparative purposes only, the share amounts in the table above assume physical
settlement of the debentures. However, if the 6.25% Debentures or 4.00% Debentures were to be converted, they will be settled by “net share” settlement,
i.e. the first $1,000 of conversion value will be paid in cash, with the remaining conversion
value to be paid, at the election of Mentor Graphics, in cash or shares of common stock. For example, if Mentor Graphics’ common stock price was $25.00 at
the time of conversion, (a) the conversion of $253 million of 4.00% Debentures would be settled
with $253 million in cash and, assuming Mentor Graphics elected to repay the remaining conversion value in shares of common stock, approximately
2.676 million shares, and (b) the conversion of $196.5 million of 6.25% Debentures would be
settled with $196.5 million in cash, and assuming Mentor Graphics elected to repay the remaining conversion value in shares of common stock,
approximately 4.280 million shares.
(3) The underlying shares for the 4.00% Debentures reflects a repurchase of approximately 1.7
million shares of common stock with $25.0 million of the net proceeds from the sale of the 4.00% Debentures. |
 Acquisition make
whole shares compensate investors for the lost coupons and option value that they paid
for when buying a convertible bond A make whole is only triggered by a cash
acquisition: A make
whole
provision
is
market
for
convertible
debt
–
all
convertible
debt
issued
by
U.S. public companies in the last twelve months has included make whole provisions
A make
whole
provision
does
not
prevent
a
change
in
control
–
it
will
not
impact
a
stock
transaction
and
it
will
only
slightly
reduce
the
premium
that
an
acquiror
is
willing
to
pay
in a cash transaction
Appendix: Overview of Make Whole
Provisions
Acquisition
Conversion Rate Adjustment
Convertible into New Shares
Cash Acquisition
Stock Acquisition
No Put; No Make Whole Adjustment
Put at 100% or Conversion with
Make Whole Adjustment
2 |
 Appendix:
Illustrative Impact of 4.00% Debentures’
Make Whole Provision
MENT
4.00%
Debentures
Change
of
Control
Make
Whole:
Adjustment
to
the
Conversion
Rate
3
For illustrative purposes, assuming Icahn’s $17 per share all cash acquisition proposal
and a closing date of April 4, 2011, the impact would be a 9.33% premium on the bonds
and a reduction in the price paid to shareholders of only $0.21 (1.24%)
Illustrative Acquisition Price
$
17.00
Make Whole Premium Calculation Per Bond
Theoretical Impact to Offer Price Calculation
Shares Underlying Bonds --
No Make Whole
48.6902
Mentor Basic Shares (PF for repurchase, no make whole)
110.653
112.357 basic -1.704 repurchase
Make Whole Shares
15.6236
(17.2990 + 13.9481)
2
x Illustrative Acquisition Price
$
17.00
Shares Underlying Bonds --
With Make Whole
64.3138
Implied Equity Value
$
1,881
+ 4.00% Debentures (1)
253
Par Value of Bond
$
1,000.00
-
Cash & Equivalents
133
Value of Bond at Acquisition Price
1,093.33
64.314 x $17.00
Implied Enterprise Value
$
2,001
% Premium Over Face Value
9.33%
-
4.00% Debentures (assuming conversion, net share settled) (1)
253
Repaid at par $1,000 + net shares
+ Cash & Equivalents
133
Implied Equity Value
$
1,881
Mentor Basic Shares (pro forma for repurchase)
110.653
Mentor Shares from Convert (net share settled)
1.389
Net shares of $93 per bond
Mentor Diluted Shares
112.042
Implied Value per Share
$16.79
$ Difference
$0.21
% Difference
1.24%
Source: Make Whole data from Indenture for 4.00% Subordinated Convertible Debentures due 2031,
Mentor Graphics 10-K dated 31-Jan-2011, Bloomberg (1) Debt pro forma for
redemption / retirement of extant 6.25% debentures and repayment of amounts outstanding on current term loan
Effective
Stock Price
Date
$14.67
$16.00
$18.00
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$60.00
$80.00
$100.00
April 4, 2011
19.4761
17.2990
13.9481
11.5561
7.9359
6.0016
4.8248
4.0337
3.4731
2.4171
1.6540
1.2010
April 1, 2012
19.4761
16.6147
13.0468
10.5478
6.9108
5.0903
4.0421
3.3633
2.8912
2.0156
1.3847
1.0097
April 1, 2013
19.4761
15.8645
12.0083
9.3637
5.7036
4.0347
3.1515
2.6108
2.2442
1.5706
1.0836
0.7927
April 1, 2014
19.4761
15.1086
10.8191
7.9467
4.2499
2.8084
2.1511
1.7827
1.5377
1.0837
0.7506
0.5509
April 1, 2015
19.4761
14.2999
9.3043
6.0394
2.3740
1.3892
1.0692
0.9039
0.7873
0.5592
0.3884
0.2858
April 5, 2016
19.4761
13.9556
8.2314
3.4939
0.0002
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|
 Effective
Stock Price
Date
11.23
$
16.00
$
20.00
$
24.00
$
30.00
$
35.00
$
March 3, 2006
33.39
19.16
13.89
11.00
8.45
7.15
March 1, 2007
33.39
17.13
12.08
9.33
7.08
5.97
March 1, 2008
33.39
14.90
9.88
7.42
5.54
4.66
March 1, 2009
33.39
12.51
7.45
5.28
3.85
3.23
March 1, 2010
33.39
9.95
4.55
2.79
1.97
1.67
March 1, 2011
33.39
-
-
-
-
-
Appendix: Mentor’s 4.00% and 6.25% Make
Whole Provisions Are Substantially Similar
The make whole provision for each series of debentures was calculated in the same
manner
The biggest difference is that the base stock price at the time of the 6.25% debentures
was $11.23 versus a stock price of $14.67 at the time of the 4.00% debentures
Compare an approximate 40% premium on both tables: $16 on Table 1 and $20 on
Table 2
To use these tables, add the base conversion rate to the table entry and then multiply
by the stock price. For example:
Table 1: 6.25% Debentures
Table 2: 4.00% Debentures
4
Premium Value of
Bond
(Par = $1,000)
Conversion
Rate
Make Whole
Adjustment
Acquisition
Stock Price
6.25%
Debentures
$1,197
=
(55.6545
+
19.16)
x
$16
4.00%
Debentures
$1,205
=
(48.6902
+
11.5561)
x
$20
Source: Indenture for 6.25% Subordinated Convertible Debentures due 2026 and Indenture for
4.00% Subordinated Convertible Debentures due 2031
Effective
Stock Price
Date
$14.67
$16.00
$18.00
$20.00
$25.00
$30.00
$35.00
April 4, 2011
19.4761
17.2990
13.9481
11.5561
7.9359
6.0016
4.8248
April 1, 2012
19.4761
16.6147
13.0468
10.5478
6.9108
5.0903
4.0421
April 1, 2013
19.4761
15.8645
12.0083
9.3637
5.7036
4.0347
3.1515
April 1, 2014
19.4761
15.1086
10.8191
7.9467
4.2499
2.8084
2.1511
April 1, 2015
19.4761
14.2999
9.3043
6.0394
2.3740
1.3892
1.0692
April 5, 2016
19.4761
13.9556
8.2314
3.4939
0.0002
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