📝 Cardlytics $CDLX (#9) MASSIVE DILUTION or regular housekeeping?

What happened with the new issue of convertible debt, cash management and financial engineering of Cardlytics

Hello my dear fellow Substack companions,

Chaos. Absolute chaos. I’ve been enjoying the past few days of very intense drama related to Cardlytics. While watching from a distance, I’ve been seeing both bears and bulls pull off some ridiculous assumptions ranging from a $10 billion valuation to, once again, going bankrupt. As always, the truth lies somewhere in between.

For those of you not aware of the latest news, Cardlytics recently skyrocketed after Q4 earnings when management announced the signing of American Express as a new client. In my semi-annual letters to the people who invest alongside me, I’ve repeatedly suggested that the number one catalyst that would drive Cardlytics towards fulfilling its destiny (of becoming the new bank minimum cashback standard) was the signing of American Express, Visa, and/or MasterCard. With this new signing announced in Q4 and formalized, hopefully by the end of March, Cardlytics enters into a new era of possibilities. The number one concern for bank partners associating with the company would probably be liquidity. It is quite likely that one of the conditions under which American Express decided to sign was the abundant availability of cash and the mitigation of any issues concerning liquidity or solvency that may affect the company. We have repeatedly seen the company addressing these issues.

One. The settlement of the bridge dispute led to a higher payout than expected but also led to certainty on the total amount and timing of said payout. The expected payout in cash was $19 million and the actual payout in cash was $25 million.

Two. Financially creative management of additional liquidity through a reverse equity buyback program. With the help of Evercore, the company agreed to an equity facility that allowed the investment bank to issue up to $50 million worth of new shares into the open market. The facility was used within a day and resulted in a dilution of 3.9 million shares.

Three. The announcement of a new convertible senior unsecured debt issue due April 1, 2029. The company expects to issue debt worth $150 to $172.5 million with an interest rate of 4.25%, and a conversion price of $18.02 per share.

Four. The acquisition of the previous convertible note series due on September 15, 2025. The company issued $230 million worth of debt with a 1% interest, with a conversion price of $85.14 per share.

With the announcement of the new debt issuance, the market decided that the potential layed out during the Q4 earnings call was no longer present, or at least a thing of the past. The possible increase in spending derived from the integration of American Express and other possible bank partners (Citi and Capital One), seems to have disappeared within a few days.

Let’s attempt to refocus the narrative on what the new debt entails and what it can lead to. On the one hand, the most logical approach is to understand the debt convertibles as a form of dilution. If the convertible debt could be turned into new equity at a moment’s notice, shareholders would be faced with up to an additional 9,572,698 shares. At the current share outstanding of 43,635,942 that would be a share count increase of 22%, and at a fully diluted share count of 53,015,393 that would be an increase of 18%. Both scenarios are objectively horrifying for common equity investors. However, Alexis DeSieno (CFO) seems to have pulled another rabbit from her hat.

“Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't get ahead paying eighteen percent” – Charlie Munger

In this case, Cardlytics is the only party that can go through with this conversion until January 2029. With this in mind, and after speaking with relevant parties involved, what the company's managers seem to understand is that the price of $18 per share may not be relevant by maturity. If the company trades at a valuation that surpasses that mark, the finance team will refinance the debt again. They can either purchase the debt on the open market or convert the debt payment into cash as it lines out the terms in the agreement. If the debt conversion price is above the price per share in 2029, which would surprise me, the company would have just issued debt at a 4.25% interest (below FFR) rather than what it should have paid for which in my opinion would have been around 11 to 12%.

Additionally, the company wants to purchase the previous convertible issuance, which seems to be trading at about $0.90 per dollar. If the company were to repurchase, this debt or part of this debt as it has laid out approximately $180 million in cash for this purpose, the company would move the market, so there seems to be an agreement with larger bondholders to purchase it at a determined price above market, but below par. This entails a purchase at a discount of at least $190 million worth of debt, meaning the company would still have to pay an additional 40 million in September 2025. We expect to see an increase in interest payments. The company used to pay 1% on their $230 million ($2.3 million yearly). The company would have to pay out $172.5M × 4.25% which roughly translates to $7.3 million in new interest payments yearly. This increase is manageable but an increase nonetheless, especially for a company that barely breaks even.

With all this information in mind, in retrospect, I should have sold options. The tremendous volatility of the stock seems to be highly linked to the lack of sight and understanding of where the company is headed. Cardlytics is notably difficult to predict on a quarterly or yearly basis. However, the long-term course of the company can be painted clearly as an idea that hinges on correct management execution. A win-win-win for banks, consumers, and advertisers that is 10x better than the present steady state.

On a last note, I wanted to do a brief cash recount that includes all the latest movements:

And on the new debt outstanding and expected interest rate payments:

This would also lead to a change in interest payment ranging from $6.4M to $7.3M in new payments plus the payments on the remaining $36.4M at 1% (an additional $0.4M). The new expected interest payments will range from $6.8M to $7.7M per year up from $2.3M.

Thanks for reading, and I hope to see you soon,

A. Yela