Amazon Fills Coffers Before Headquarters Deal: Corporate Finance

Amazon Fills Coffers Before Headquarters Deal
Amazon’s profit margin of 0.07 percent in the last 12 months is the least among profitable companies in the Standard & Poor’s 500 index of stocks. Photographer: David Paul Morris/Bloomberg Inc. raised $3 billion in the bond market after an absence of more than a decade as its planned headquarters purchase is pushing capital spending beyond the cash it generates for the first time since 2001.

The world’s largest online retailer issued three-, five-and 10-year debt yesterday in its first dollar-denominated offering since 1999, according to data compiled by Bloomberg. Proceeds will help fund the $1.16 billion purchase of Amazon’s corporate base, Moody’s Investors Service said in a report.

That transaction, which the Seattle-based company expects to complete in the fourth quarter, may boost 2012 capital expenditures to a record $3.1 billion, which would exceed operating cash flow of $2.5 billion. Amazon’s bond sale after it posted almost $3 billion of cash on Sept. 30 signals the company may be willing to raise its debt burden to fund future investments, according to DoubleLine Capital LP.

“Whether or not they’re going to be willing in the future to push leverage up for capex is the main concern,” Jeffrey Lee, an analyst at Los Angeles-based DoubleLine, which oversees $50 billion of assets, said in a telephone interview. “Rates are low and they’re just jumping on the bandwagon to issue.”

Amazon issued $750 million of 0.65 percent notes due in 2015, $1 billion of 1.2 percent, five-year debt and $1.25 billion of 10-year securities that pay a 2.5 percent coupon, Bloomberg data show.

‘Investment Mode’

The coupons are less than the average yields of U.S. investment-grade bonds with similar maturities, according to Bank of America Merrill Lynch index data. Investment-grade bonds maturing in about three years yield an average 1.7 percent, with five- and 10-year bonds paying an average 2.1 percent and 3.5 percent, Bank of America Merrill Lynch index data show.

Amazon’s three- and 10-year debt fell today, with the 2.5 percent securities declining 0.17 cent on the dollar to 99.1 cents and yielding 2.6 percent 11:50 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The five-year bonds rose 0.09 cent to 99.67.

“We’re in investment mode,” Craig Berman, an Amazon spokesman, said yesterday in a Bloomberg television interview with Cory Johnson. “To accommodate the growth, and to accommodate customers continuing to visit Amazon, we’ve been expanding our fulfillment center network.”

Ty Rogers, an Amazon spokesman, declined to comment on the debt offering, which the company said in a regulatory filing would fund general corporate purposes.

Capital Spending

“They’ve started to expand their product diversification, as well as spend more money on infrastructure, to meet the growth trajectory that they’ve experienced over the years,” Thomas Chow, a money manager at Delaware Investments in Philadelphia with about $170 billion under management, said in a telephone interview. “It’s one of those names that you just don’t foresee being a near-term problem” with Amazon managing “a very conservative balance sheet to this point,” he said.

Yesterday’s offering should bolster Amazon’s $5.2 billion of cash and short-term investments, with capital spending set to surge almost 70 percent from 2011, Bloomberg data show. The bond sale will also more than double the company’s $2.7 billion of long-term liabilities, which have increased from $652 million in the first quarter of 2009.

11-Building Complex

Chief Executive Officer Jeff Bezos “always has a long-term focus on customer satisfaction and lowering costs, and that historically has led to significant capital outlays,” Joel Levington, managing director for corporate credit at Brookfield Investment Management Inc. in New York, said in an e-mail message. “The bonds provide flexibility for these actions.”

The debt will fund the purchase of Amazon’s 11-building complex with 1.8 million square feet (167,000 square meters) of space in Seattle’s South Lake Union neighborhood, Moody’s said in the report. The transaction would be the largest of more than $3 billion of office deals under contract or on the market in Seattle, Kevin Shannon, vice chairman at Los Angeles-based real estate services firm CBRE Group Inc., said before the agreement was announced in an October regulatory filing.

The increase in spending coincides with cash from operating activities that may drop 35 percent in 2012 to the lowest level since 2008, Bloomberg data show. Amazon’s profit margin of 0.07 percent in the last 12 months is the least among profitable companies in the Standard & Poor’s 500 index of stocks. The gauge has declined from 3.83 percent in March 2010.

‘Their Dominance’

Narrowing margins also helped to push Amazon’s credit rating down to Baa1, according to Moody’s senior credit officer Margaret Taylor. That’s four grades below the level implied by Bloomberg’s default risk scale.

“You look at the strength of the brand name, the size of the business, their dominance in their market -- all of those factors would support a higher rating,” Taylor said in a telephone interview. “What brought them down from all those really strong qualitatives were our concerns around the level of future earnings.”

The online retailer is betting investments in technology and hardware for the Kindle Fire tablet released last year and money spent in its server-renting business will pay off down the line. Equity investors are showing confidence the company will make good on its growth plans. Shares of Amazon, which have surged 41 percent this year and now cost 461 times its annual earnings, are the most expensive of any company in the S&P 500, Bloomberg data show.

Cyber Monday

Amazon is poised to benefit from a record $43.4 billion holiday sales season, according to a report from ComScore Inc., as shoppers increasingly rely on social networks and mobile devices to find and buy merchandise. Web retailers have been eager to exploit the growth of smartphones and tablets by offering sales, with the bulk of deals rolled out yesterday on so-called Cyber Monday.

“We see no danger to Amazon’s leading market position,” David Kuntz, a credit analyst at S&P who ranked Amazon’s new debt AA-, said in a report yesterday. A strong brand name, broad product offerings, experienced management and geographic diversity “far more than offset some of the risks from a rapid growth strategy, margin erosion due to significant investment in infrastructure and the drag of shipping costs exceeding shipping revenues,” he wrote.

Amazon’s sales may rise to $62.1 billion this year, up from $24.5 billion in 2009 and more than 400 times the sales recorded in 1997, when the company went public after Bezos wrote out a business plan for an online bookseller on a cross-country car ride to Seattle.

While sales growth of 41 percent last year was more than triple the average among S&P 500 firms, increases in operating expenses at the online retailer have outpaced its rise in revenue for the past three years, Bloomberg data show. Expenses of $13.1 billion in the last 12 months accounted for 23 percent of revenue, the highest level since 2001.

“They’re involved in some pretty capital-intensive projects in terms of trying to win more market share,” James Goldstein, an analyst at bond research firm CreditSights Inc. in New York, said in a telephone interview. “Going to the bond market and issuing at the prices they’re seeing, which are pretty low, is attractive to them.”

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