Strategy Sells New Preferred at 12.5% as Investors Sour on Its Common Stock

Strategy offered 7.75 million shares Euro-denominated preferred, its fifth preferred offering to date. (Dreamstime)

Strategy needed to offer a juicy 12.5% yield on a new issue of preferred stock targeted to European institutional buyers as investors sour on the company’s common stock and demand high yields on its preferred.

Strategy, formerly known as MicroStrategy , offered 7.75 million shares of Euro-denominated preferred, its fifth preferred offering to date, with a 10% annual dividend at a price of 80 euros per share, which works out to a yield of 12.5%. The deal will raise just over $700 million after expenses at current exchange rates. Face value of the preferred is 100 euros per share.

The offering is Strategy’s first non-U. S. preferred offering as the big Bitcoin holder moves to diversify its funding sources. It will be traded on Europe MTF, which is affiliated with the Luxembourg Stock Exchange. Strategy’s other four U.S. preferred deals are Nasdaq listed. Those now yield in a range of 9% to 13%.

Strategy stock is down 3.2% to $229.63 Friday after hitting a new 52-week low of $219.68. The stock continued to underperform Bitcoin, which is down about 0.7% Friday to $100,500.

The stock drop occurred amid apparent investor concerns over the company’s ability to service the preferred dividends and debt interest costs, as well as the potential need to pay off a $3 billion issue of zero-coupon convertible debt that can be redeemed by investors in June 2028.

Strategy now is valued at 1.24 times its net asset value (NAV), according to the company’s website. That’s down from nearly two times in late July and three times a year ago when the stock peaked at $543 a share. The current price/NAV could be the lowest level of the year.

Strategy’s market value now is $66 billion, close to the value of its Bitcoin investments of $65 billion. The company includes some $8 billion of debt and $6.7 billion of preferred stock in its NAV calculation.

One problem for Strategy is that it has $689 million of annual preferred and debt servicing payments (nearly all dividends on preferred) and little income to make those payments since its Bitcoin holdings yield nothing and its software business throws off little cash earnings.

Strategy chairman Michael Saylor and other executives have expressed confidence in the company’s ability to access capital markets to make the payments.

“We have more than sufficient access to liquidity to manage our total annual interest and dividend obligations through our proven track record of capital-raising activities,” said CFO Andrew Kang on the company’s recent earnings conference call.

The company however has been selling considerably less equity than it was earlier this year.

And the company is reluctant to sell Bitcoin to make those payments.

The bull case for the preferred is that Strategy’s Bitcoin holdings are worth four times the combined value of the debt and preferred, effectively making the preferred an asset-backed security. The company could sell a small portion of its Bitcoin if needed to pay preferred dividends and pay off any debt. Barron’s has written favorably on Strategy preferred for that reason.

But Barron’s warned that Strategy stock was expensive a year ago when it traded close to $400. Since then, the stock is down 40% while Bitcoin is little changed.

Write to Andrew Bary at andrew.bary@barrons.com