Payment services provider Square said Monday that it will raise roughly $1 billion from new convertible notes, just days after the fintech revealed it will substantially increase spending on new hires, marketing and potential new acquisitions.
Square officials said last Thursday that the San Francisco-based firm will “incrementally” increase operational expenses by up to $850 million next year, about a quarter of which would be allocated toward new products and infrastructure.
This latest offering follows an earlier one that raised around $1 billion in early March, as the San Francisco-based company saw its operating expenses swell by 50% year over year thanks to a new marketing campaign for Cash App.
Square intends to issue $500 million in convertible senior notes due May 2026 and another $500 million in senior notes due in November 2017 to institutional investors. Convertible notes may be redeemed for cash, stocks in the issuing firm or a combination of both.
Initial buyers will have an option to purchase up to an additional $75 million in each of the notes for 30 days to cover any over-allotments, the company said.
Concurrently, Square plans to enter private convertible note hedges with one or more of the initial buyers, which is “generally” expected to offset potential dilution of its stocks upon conversion of notes and to offset its cash payments to investors, the firm said.
It will also enter warrant transactions with its hedge counterparties, which “could separately have a dilutive effect to the extent the market value per share of Class A common stock exceeds the strike price of any warrant transactions.” In the event of over-allotment, Square may seek additional warrant deals.
The counterparties involved in these deals may buy Square stocks to enter into derivative contracts during or after the pricing of the notes, the company said, potentially affecting the market price of Square stocks or outstanding notes.
A “portion” of the sales will pay for the cost of the hedges while the rest will be used for “general corporate purposes,” Square said. The fintech had about $1.76 billion in long-term debt at the end of September, according to its quarterly earnings report.
Square has been aggressively ramping up its marketing costs this year as the COVID-19 pandemic drove increased consumer adoption of new digital finance products. According to a recent survey by fintech Plaid, more than half of Americans say they use financial apps more now than ever before to manage their money.
The company posted $520 million in operating expenses minus loan losses in the first quarter, up 33% from the prior-year quarter. About $195 million of that were sales and marketing expenses, up 45% year over year.
Marketing for Cash App, Square’s consumer digital wallet product, was up roughly 82% year over year, as the company “modified” its marketing strategy in response to the pandemic. This trend only continued to accelerate as Cash App’s marketing expenses grew 114% year-over-year in the second quarter and 217% last quarter.
The fintech plans to inject roughly $425 million in additional advertising dollars next year to sustain its media campaign, which is expected to reach an estimated 50 million potential customers by the end of 2020.
Square Chairman and CEO Jack Dorsey also hinted last week that the company may seek out new fintech deals in Bitcoin and artificial intelligence in 2021 to shore up its products roster and digital infrastructures.
Square is said to be in talks with Credit Karma to absorb the personal-finance firm’s tax-preparation business as regulators probe the latter over antitrust concerns stemming from its $7.1 billion takeover by Intuit.
--Additional reporting by Zack Fishman