After recently authorising an expanded share repurchase programme, Dropbox instead sold stock in the form of a two-part, US$1.3bn upsized CB. Dropbox did so at double its current share price with the benefit of a derivative while also buying back US$200m of stock at its current share price. “We’ve been pitching for them to do some sort of financing for a long time,” said one equity-linked banker involved in the transaction. “They are sitting on a lot of cash and this gives them even more cash to figure out what to do with.” The attractive terms achieved make it understandable why the file sharing company finally opted to pull the trigger on its first equity-linked raise since going public in early 2018. The US$653m five-year CB priced at a zero percent coupon and 65% conversion premium, through the aggressive ends of 0% fixed and 55%–60% price talk on a deal originally sized at US$576.5m. The longer-dated seven-year CB, also increased in size to US$653m from US$576.5m, priced at a zero percent coupon and 52.5% conversion premium, at the aggressive ends of 0%–0.5% and 47.5%–52.5% price talk. JP Morgan, Goldman Sachs, RBC Capital Markets and Bank of America were joint bookrunners on the financing. Several technical issues assisted Dropbox. The company spent US$200m of the proceeds on a concurrent share repurchase and another roughly US$60m on a capped call to offset economic dilution to double the reference used in pricing the CB. The shares repurchased were offered on swap to arb funds that participated, providing certainty on borrow. The capped call has a similar benefit, as the counterparty bank hedges its exposure of long-delivery at the upper strike by buying stock. Dropbox’s shares rose 3% to US$23.18 while the financing was being marketed on Tuesday, despite a choppy tape for tech names. A lower nominal share price, relative to other high-flying zero-coupon issuers like Expedia and Peloton, helped attract outright, long-only buyers, said the banker, who estimated half the deal went to outright buyers. Dropbox bought back 8.6m shares, about 2% of outstanding, at US$23.18 and sold 28m shares at US$46.36. Not quite at zero-coupon borrowing, after factoring in the cost of the buyback and capped call, but obviously a compelling cost of funding. Dropbox spent US$397.5m last year to repurchase 20.2m shares (US$19.68 apiece). The company is now sitting on a roughly US$2.1bn cash pile. Dropbox is coming off a quarter that saw it grow revenue by just 13.3% year-over-year to US$504.1m, while generating US$158.4m of free cashflow in the process. Management is guiding toward 27.5% operating margins this year, above the 25.3% margin in the fourth quarter and 23% consensus for the year, and reiterated its target to grow free cashflow to US$1bn annually by 2024. That type of profitability was good enough to support credit assumptions in marketing the five-year and seven-year CBs of L+200bp and L+225bp, offset by 42 and 40 implied vol.