Coinstar’s New Debt: Here’s How We Think They Will Use the Cash

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

After the market close on Monday, Coinstar (NASDAQ:CSTR) announced that it intends to offer $300 million of senior unsecured notes due in 2019 in a private placement. The company intends to use the proceeds from the offering for general corporate purposes. Terms and timing were not specified, and we did not speak with the company. Coinstar ended Q4:12 with $283 million in cash (≈ $9/share) and $357 million in debt (excluding capital leases), compared with $308 million in cash and $373 million in debt at the end of Q3:12.

We expect the company to use the proceeds to buy back existing debt and/or to force conversion of its outstanding convertible debentures and retire a like number of shares, so we do not expect overall debt to increase for very long, if at all. At its Analyst Day last week, the company made clear that it intended to fund its new ventures, including Crisp Market (fresh food), Rubi (coffee), Sample It! (beauty products), and Star Studio (photo booth), out of operating cash flow. Coinstar plans to install 1,000 – 2,300 net new kiosks for new ventures in 2013, with overall costs likely of $15 – 25 million. The company was clear that it can fund its capital program from operating cash flow, and expected at least $100 million of excess cash flow to be made available for share repurchases. Monday’s announcement of new financing makes sense only if the company intends to use the proceeds to retire existing debt or to force conversion and buy back a like number of shares. We believe that management will elaborate on its intentions at the Wedbush Transformational Technologies conference this week (Coinstar presents on Thursday, March 7).

While we are skeptical about the prospects for most of Coinstar’s new ventures, we are optimistic about the potential for coffee, gift card exchanges and ticket sales, each of which could contribute to sales in the near-term at a relatively low cost. Coffee has been tested for the last two years, and the company intends to begin its rollout to 15 geographic markets this year. Gift card exchanges will be integrated into existing Coinstar kiosks, while ticket sales can be completed at certain existing Redbox kiosks. The company estimates that there is $7 – 8 billion of uncaptured gift card volume each year. We think that ticket sales present a…