Now that Goldman Sachs has succeeded in its mission of helping Apple fend off David Einhorn’s demand that it raise a two hundred plus billion dollars of preferred stock, I guess it’s time for someone at Goldman to sit down with Apple and say “now, guys, really, you ought to think about raising two hundred billion dollars of preferred stock, it’s just the sensible thing to do.” Or something. This debt-financed share-buyback plan doesn’t sound like too much fun for the bankers:

On April 23, Cupertino, California-based Apple said it would return an additional $55 billion in cash to shareholders to compensate for a stock that’s dropped on signs that the company’s growth is slowing. Although it has $145 billion of cash, Apple said it will use debt to help finance a total capital reward of about $100 billion to shareholders. …

Because investment-grade debt offerings typically pay low fees, banks may offer to do the transaction for little or no charge, [Sanford Bernstein analyst Brad] Hintz said.

“This is going to be a prestige-per-share, not an earnings-per-share, deal,” said Hintz, who worked as Morgan Stanley’s treasurer and as the chief financial officer at Lehman Brothers Holdings Inc. earlier in his career. “We’re really talking about a deal that’s going to be done as close to gratis as you can get.”

The amount Apple will be raising is a little unclear but $50 billion over the next three years is … possible? Maybe?1 While not quite up to Einhorn’s proposal that Apple issue more preferred stock than there is in the world, that’s at least pretty big, competitive with, say, all the computer-company debt in America.2 Anyway, big number, though it’s unclear how that will translate into revenue. Microsoft paid a blended 54bps to banks on its $2bn debt deal last week, and Microsoft, unlike Apple, is AAA rated.3 And 54bps on, like, a zillion dollars of debt really ought to be enough to keep Goldman and Deutsche – who seem to be the leading contenders for the job – fed and clothed.4

On the other hand, $50 billion isn’t $2 billion, so there’s presumably a volume discount. And despite its better rating, Microsoft isn’t Apple.5 Close-to-gratis is a possibility. They should really push for the more lucrative iPrefs idea.

I realize my sympathies are skewed here but still I cringe a little when I read things like this:

Goldman Sachs Group Inc., which has been advising Apple Inc. on how to deal with its multibillion- dollar cash pile, and Deutsche Bank AG, Germany’s biggest lender, are in the lead to help the iPhone maker sell bonds for the first time in 17 years.

Apple asked the two banks, based in New York and Frankfurt, to arrange phone interviews with fixed-income investors today in advance of a potential deal, according to a person familiar with the offering who asked not to be identified because the terms aren’t set.

I’m sure that, like, “arranging phone interviews with fixed-income investors” – for a giant Apple bond deal! – isn’t all that taxing for GS and DB. The pleasure is all theirs, as it were, for a suitably weak sense of “pleasure.” Still it’d be not much fun at all to provide investment banking services to Apple and then watch someone else actually do the deal, and get the fees. Apple announced its potential borrowing last week, and filed its shelf registration statement for the new bonds today, meaning that every bank in the world has presumably been pestering them for a piece of this bond deal. While Goldman and Deutsche are doing the work for the deal out of, basically, hope and customer-friendliness.

The fact that Goldman and Deutsche are working for Apple for free, in the hopes of getting hired to do more work for Apple for almost-free, is a good reminder that investment banking, for big clients, works more or less on a tips basis: the clients decide who they want to pay and how much,6 and the bank smiles and says “thank you” and, if they miss out, just work harder to get into the next deal. I sometimes wonder if this system creates problems for smaller clients – if you feel ill-used in missing out on one deal, you might take your revenge by screwing a client on another – but it seems pretty nice for Apple. Strange that although “Steve Jobs married a former Goldman Sachs fixed- income strategist, he disliked bankers and preferred doing deals without them.”

Goldman Seen Joined by Deutsche Bank on Apple Offering [Bloomberg]
Apple S-3ASR [EDGAR]

1. Is it? A Goldman analyst report from April 24 assumes $8bn/year in 2013/14/15, for a $24bn total. Here is a claim that Apple could be “borrowing $55 billion in less than three years, according to research firm CreditSights, or nearly $20 billion a year.” Here is a claim that CreditSights thinks the right number is $15-20bn. The math – $145bn of cash, $102bn of it offshore, $100bn of spend in 2013-2015, ~$40bn in FCF per year – is ambiguous but seems to support something closer to the smaller numbers.

2. Which is like $78bn:

Here’s the list; even a smaller number could put Apple #1 among computer company issuers:

3. Apple is rated Aa1 at Moody’s and AA+ at S&P. Also Fitch is apparently peeved it’s not getting paid to rate Apple? I’ve made this point before, but really: a job I’d love is to be the guy at a ratings agency in charge of issuing petulant reports on companies that aren’t paying my agency for a rating. “Nice share repurchase plan you’ve got there, Apple,” I’d say. “It’d be a pity if anything” oh etc. you know the rest. Actually as I type it, never mind, it’d be kind of embarrassing. Like you can’t feel good about yourself if you’re the Fitch analyst who’s all “NO APPLE ARE NOT AA!!” Who asked you, man?

4. Like, on $50 billion it’s ~$270mm, more than GS and DB have made, combined, on U.S. investment-grade underwriting year-to-date:

5. You could, for instance, say “Apple is different, and not just because fixed-income fund managers may want to feel like the cool kids for once.” Mostly because of that though? Facebook really should do a debt IPO.

6. Littler clients get to decide who to pay, but not how much.

5 comments (hidden for your protection)
Show all comments ↓

Comments (5)

  1. Posted by WrteStufLA | April 29, 2013 at 7:12 PM

    With Apple's zero debt and as much cash as they have and are positioned to continue accumulating, why isn't Apple rated AAA? (Or is there situation similar to an individual who — despite a high income — because they don't carry debt, therefore don't have enough of a payment history to receive a high credit rating … ?)

  2. Posted by Laughing_Boy48 | April 29, 2013 at 8:47 PM

    I'd heard the reason why Apple isn't rated AAA is because of the business they're in. It's claimed the smartphone market isn't reliable enough because it depends on the whims of consumers. As you know, the smartphone market has been very volatile for a number of companies like Nokia, RIM, Motorola, Palm. So the banks see Apple as a higher risk than some other businesses like Microsoft or Oracle. That's just the way it goes. Still, AA is pretty darn good in these troubled times thanks to that enormous Apple cash pile.

  3. Posted by St. Copious | April 30, 2013 at 2:16 AM

    Here's hoping that AAPL bond investors are a little smarter than FB IPO investors, and do some actual work to figure out a fair price, rather than buying negative yield because the company is "cool."

  4. Posted by hwwesq | May 1, 2013 at 6:38 AM

    Why is Apple borrowing, when they have the money offshore to finance the deal?

    Is there a mistake in my idea? – Apple forms an offshore corporation (say “BuyCo”), funds it with $60 billion of offshore cash, and has BuyCo purchase $60 billion of Apple stock.

    The stock becomes like shelf stock, with the feature that any future, raised dividends become cash in BuyCo’s treasury. Advantages: no interest paid on any debt and the stock is available for future offshore deals.

    What am I not seeing?

  5. Posted by Rick | May 1, 2013 at 3:30 PM

    If you look at the Pro Supps that got filed, the total street fees were $53.25mm. I believe Goldman got ~72% of the fees, which is $38.3mm. Not really working for free… Matt you worked in Capital Markets – you need to check the Pro Supp!