Unity's $1.5 Billion Convertible Senior Notes Offering: A Strategic Move or a Risky Gamble?

Unity Software Inc. (NYSE: U), the world's leading platform for creating and operating interactive, real-time 3D (RT3D) content, has announced its intent to offer $1.5 billion aggregate principal amount of Convertible Senior Notes due 2026 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The company also intends to grant the initial purchasers of the Notes an option to purchase, within a 13-day period beginning on, and including, the date on which the Notes are first issued, up to an additional $225.0 million aggregate principal amount of Notes. The sale of the Notes to the initial purchasers is expected to close on November 19, 2021, subject to customary closing conditions.

The Notes will be general unsecured obligations of Unity and will accrue interest payable semiannually in arrears. Upon conversion, Unity will pay or deliver, as the case may be, cash, shares of Unity's common stock or a combination of cash and shares of Unity's common stock, at its election. The interest rate, initial conversion rate, and other terms of the Notes will be determined at the time of pricing of the Offering.

Unity expects to use a portion of the net proceeds from the Offering to pay the cost of the capped call transactions described below, and the remaining net proceeds for general corporate purposes and for acquisitions or strategic investments in complementary businesses or technologies. If the initial purchasers exercise their option to purchase additional Notes, Unity expects to use a portion of the net proceeds from the sale of the additional Notes to enter into additional capped call transactions with the Option Counterparties (as defined below) and the remaining net proceeds for general corporate purposes and for acquisitions or strategic investments in complementary businesses or technologies.

In connection with the pricing of the Notes, Unity expects to enter into capped call transactions with one or more of the initial purchasers or affiliates thereof and/or other financial institutions (the "Option Counterparties"). The capped call transactions will cover, subject to customary adjustments, the number of shares of Unity's common stock initially underlying the Notes. The capped call transactions are expected generally to reduce the potential dilution to Unity's common stock upon any conversion of Notes and/or offset any cash payments Unity is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap.



The proposed offering of convertible senior notes by Unity impacts the company's capital structure and financial flexibility in several ways. First, the issuance of convertible senior notes represents an increase in Unity's debt obligations. As of the date of the offering, Unity's total debt was $2.2 billion. The addition of $1.5 billion in convertible senior notes will increase Unity's total debt to $3.7 billion, assuming the initial purchasers do not exercise their option to purchase additional notes. This increase in debt obligations may limit Unity's financial flexibility, as it will need to allocate resources to service and repay its debt obligations.

Second, the issuance of convertible senior notes will also impact Unity's debt-to-equity ratio. As of the date of the offering, Unity's debt-to-equity ratio was 65.3%. Assuming the initial purchasers do not exercise their option to purchase additional notes, the issuance of $1.5 billion in convertible senior notes will increase Unity's total debt to $3.7 billion, while its total shareholder equity remains at $3.4 billion. This will result in a new debt-to-equity ratio of approximately 108.8%. A higher debt-to-equity ratio may indicate that the company is more leveraged and potentially more vulnerable to changes in its financial performance.

Third, the proposed offering provides Unity with additional financial flexibility to pursue growth opportunities and invest in its business. The net proceeds from the offering are expected to be used for general corporate purposes and for acquisitions or strategic investments in complementary businesses or technologies. This could potentially accelerate the company's growth and expansion into new markets or areas of interest. However, the increased debt obligations may also limit Unity's financial flexibility, as it will need to allocate resources to service and repay its debt obligations.

The potential benefits and risks associated with the conversion of these notes into common stock for both Unity and its shareholders are significant. For Unity, the conversion of the Notes into common stock could result in dilution for existing shareholders. However, Unity expects to enter into capped call transactions with Option Counterparties to reduce the potential dilution to Unity's common stock upon any conversion of Notes and/or offset any cash payments Unity is required to make in excess of the principal amount of converted Notes, with such reduction and/or offset subject to a cap. This could help Unity conserve cash and potentially reduce the impact of dilution on existing shareholders.

For shareholders, the conversion of Notes into common stock could present both potential benefits and risks. If the conversion price is lower than the market price of Unity's common stock at the time of conversion, shareholders who convert their Notes into common stock could benefit from the potential upside in the share price. However, if the conversion price is higher than the market price of Unity's common stock at the time of conversion, shareholders who convert their Notes into common stock could face a potential downside in the share price. Additionally, the conversion of Notes into common stock could lead to dilution, potentially decreasing the value of existing shares and the overall market capitalization of the company.

In conclusion, Unity's proposed offering of $1.5 billion aggregate principal amount of Convertible Senior Notes due 2026 presents both potential benefits and risks for the company and its shareholders. While the offering provides Unity with additional financial flexibility to pursue growth opportunities and invest in its business, the increased debt obligations may also limit Unity's financial flexibility and potentially increase its vulnerability to changes in its financial performance. The potential conversion of the Notes into common stock presents both potential benefits and risks for shareholders, depending on the conversion price and the impact on the company's market capitalization. Investors should carefully consider these factors and make informed decisions based on their individual investment objectives and risk tolerance.