Cloudflare Announces Proposed $1.75 Billion Offering of Convertible Senior Notes Due 2030
Cloudflare, Inc. (“Cloudflare”) (NYSE: NET), a leading provider of web security and performance solutions, has announced its intention to offer $1.75 billion in aggregate principal amount of Convertible Senior Notes due 2030 (the “notes”). This private offering will be made available exclusively to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The offering is subject to market conditions and other factors, and Cloudflare reserves the right to modify or withdraw the offering at its discretion.
In addition to the initial offering, Cloudflare plans to grant the initial purchasers of the notes a 13-day option to purchase up to an additional $250 million in aggregate principal amount of the notes to cover over-allotments, should demand exceed expectations.
Key Features of the Convertible Senior Notes
The notes will serve as senior, unsecured obligations of Cloudflare. They will accrue interest, payable semi-annually in arrears, and are convertible into cash, shares of Cloudflare’s Class A common stock, or a combination thereof, at Cloudflare’s discretion. The specific terms of the notes, including the interest rate, conversion rate, and other details, will be determined at the time of pricing.
To mitigate potential dilution to Cloudflare’s Class A common stock upon conversion of the notes, the company intends to enter into privately negotiated capped call transactions with one or more of the initial purchasers, their affiliates, or other financial institutions (collectively referred to as the “option counterparties”). These capped call transactions are designed to offset dilution and/or reduce any cash payments Cloudflare may need to make in excess of the principal amount of converted notes, subject to a cap. The cap price of these transactions is expected to represent a premium of at least 150% over the last reported sale price of Cloudflare’s Class A common stock on the pricing date of the offering.
Market Impact of Hedging Activities
Cloudflare has been advised that, in connection with establishing their initial hedges for the capped call transactions, the option counterparties or their affiliates may purchase shares of Cloudflare’s Class A common stock and/or engage in various derivative transactions related to the stock concurrently with or shortly after the pricing of the notes. This activity could influence the market price of Cloudflare’s Class A common stock or the trading price of the notes at that time, potentially increasing the stock price or reducing the size of any decline.
Furthermore, the option counterparties and/or their affiliates may modify their hedge positions by entering into or unwinding derivatives related to the Class A common stock, purchasing or selling shares of the stock, or engaging in other secondary market transactions. Such activities may occur following the pricing of the notes, prior to their maturity, or in response to early conversions, repurchases, or redemptions of the notes. These actions could impact the market price of the Class A common stock or the trading price of the notes, potentially affecting noteholders’ ability to convert the notes. If such activity occurs during the final observation period for note conversions, it could also influence the number of shares, if any, and the value of the consideration noteholders receive upon conversion.
Use of Proceeds from the Offering
Cloudflare intends to allocate a portion of the net proceeds from the offering to cover the cost of the capped call transactions. If the initial purchasers exercise their option to purchase additional notes, Cloudflare plans to use a portion of the proceeds from the sale of those additional notes to enter into corresponding capped call transactions. The remaining proceeds will be used for general corporate purposes, which may include working capital, capital expenditures, repayment of outstanding debt, and funding potential acquisitions or strategic transactions.
Private Placement and Regulatory Considerations
The notes will be offered solely to persons reasonably believed to be qualified institutional buyers under Rule 144A of the Securities Act. The offering will be conducted through a private placement memorandum. Neither the notes nor the shares of Cloudflare’s Class A common stock potentially issuable upon conversion of the notes have been, or will be, registered under the Securities Act or the securities laws of any other jurisdiction. As such, they may not be offered or sold in the United States unless registered or pursuant to an applicable exemption from registration requirements.
Strategic Implications of the Offering
This proposed offering underscores Cloudflare’s commitment to strengthening its financial position while providing flexibility for future growth initiatives. By issuing convertible senior notes, the company aims to capitalize on favorable market conditions to secure long-term funding at attractive terms. The inclusion of capped call transactions further demonstrates Cloudflare’s focus on minimizing shareholder dilution while maintaining alignment with investor interests.
The proceeds from the offering are expected to support Cloudflare’s ongoing expansion efforts, including investments in research and development, infrastructure enhancements, and potential acquisitions. These funds will enable Cloudflare to continue delivering innovative solutions to its global customer base while positioning the company for sustained success in an increasingly competitive market.
