The analyst who wrote this article owns shares of MicroStrategy (MSTR).
Since MicroStrategy (MSTR) became a bitcoin treasury company in August 2020, it has used three main instruments to acquire bitcoin (BTC): cash on hand, at-the-market (ATM) offerings, and convertible bond offerings.
MicroStrategy’s next method of raising capital is to purchase bitcoin through perpetual preferred stock, which was announced to the market on January 3. MicroStrategy has announced a $2 billion capital raise through one or multiple offerings, according to Benchmark.
Benchmark hosted a recent investor meeting with MicroStrategy CEO Michael Saylor at the ICR conference in Orlando to discuss the perpetual preferred stock offering.
A perpetual preferred stock generally has no fixed expiration date and continues indefinitely unless the company decides to redeem it or put an expiration date on it. Shareholders of the stock receive fixed dividend payments but do not have voting rights. The company may have the right to repurchase the shares at a predetermined price after a specific date. In the case of a liquidation event, perpetual preferred shareholders are paid before common shareholders but later debt holders.
Perpetual shares are an attractive instrument due to the lack of a set maturity date, unlike MSTR convertible bonds, where some are already in the money and eligible for conversion. Convertible bonds tend to have a term of about four to eight years, Saylor said at the conference.
According to the memo, Saylor said perpetual preferences were advantageous because of their long duration. The instrument functions as a built-in indefinite call option in addition to a lump sum payment of principal. The company would benefit as it would be less fragile due to the longer duration of the capital structure.
According to Benchmark, perpetual preferred stocks could achieve a mid-single-digit yield, with low volatility and no options market, the opposite of a convertible bond.
Perpetual preferences would be attractive to large institutions such as pension funds and banks, as they would receive a stable and fixed dividend payment.
Terms of the perpetual preferred stock have not yet been announced. We know this will come in the first quarter and that the terms of the offering should include dividend payments, convertibility to Class A common stock, and provision for share redemption, according to MicroStrategy’s Jan. 3 press release.
Benchmark maintains its buy rating on MSTR with a $650 price target.
As of Monday, MicroStrategy purchased another 2,530 BTC, bringing total holdings to 450,000 BTC.
Next week, MicroStrategy’s Special Shareholders’ Meeting will be held on January 21. Investors will vote on the increase in authorized Class A common and preferred shares. MSTR’s fourth-quarter earnings call is scheduled for February 4.
