Unity Upsizes Convertible Senior Notes Offering to $600.0 Million

Unity Software Inc. (NYSE: U), the leading platform for creating and operating interactive, real-time 3D (RT3D) content, has announced the pricing of an upsized offering of $600.0 million aggregate principal amount of Convertible Senior Notes due 2026. The offering, initially announced as $1.5 billion, was increased to $1.75 billion, reflecting strong investor demand. The Notes will be general unsecured obligations of Unity and will accrue interest payable semiannually in arrears. Upon conversion, Unity will pay or deliver, as the case may be, cash, shares of Unity's common stock or a combination of cash and shares of Unity's common stock, at its election.

Unity expects to use a portion of the net proceeds from the Offering to pay the cost of the capped call transactions described below, and the remaining net proceeds for general corporate purposes and for acquisitions or strategic investments in complementary businesses or technologies. If the initial purchasers exercise their option to purchase additional Notes, Unity expects to use a portion of the net proceeds from the sale of the additional Notes to enter into additional capped call transactions with the Option Counterparties (as defined below) and the remaining net proceeds for general corporate purposes and for acquisitions or strategic investments in complementary businesses or technologies.

In connection with the pricing of the Notes, Unity expects to enter into capped call transactions with one or more of the initial purchasers or affiliates thereof and/or other financial institutions (the "Option Counterparties"). The capped call transactions will cover, subject to customary adjustments, the number of shares of Unity’s common stock initially underlying the Notes. The capped call transactions are expected generally to reduce the potential dilution to Unity’s common stock upon any conversion of Notes and/or offset any cash payments Unity is required to make in excess of the principal amount of converted Notes, with such reduction and/or offset subject to a cap.

The proposed offering of convertible senior notes by Unity impacts the company's capital structure and financial flexibility in several ways. First, the issuance of convertible senior notes represents an increase in Unity's debt obligations. As of the date of the offering, Unity's total debt was $2.2 billion. The addition of $1.75 billion in convertible senior notes will increase Unity's total debt to $3.95 billion, assuming the initial purchasers do not exercise their option to purchase additional notes. This increase in debt obligations may limit Unity's financial flexibility, as it will need to allocate resources to service and repay its debt obligations.

Second, the issuance of convertible senior notes will also impact Unity's debt-to-equity ratio. As of the date of the offering, Unity's debt-to-equity ratio was 65.3%. Assuming the initial purchasers do not exercise their option to purchase additional notes, the issuance of $1.75 billion in convertible senior notes will increase Unity's total debt to $3.95 billion, while its total shareholder equity remains at $3.4 billion. This will result in a new debt-to-equity ratio of approximately 116.2%. A higher debt-to-equity ratio may indicate that the company is more leveraged and potentially more vulnerable to changes in its financial performance.

Third, the proposed offering provides Unity with additional financial flexibility to pursue growth opportunities and invest in its business. The net proceeds from the offering are expected to be used for general corporate purposes and for acquisitions or strategic investments in complementary businesses or technologies. This could potentially accelerate the company's growth and expansion into new markets or areas of interest. However, the increased debt obligations may also limit Unity's financial flexibility, as it will need to allocate resources to service and repay its debt obligations.

The potential benefits and risks associated with the conversion of these notes into common stock for both Unity and its shareholders are significant. For Unity, the conversion of the Notes into common stock could result in dilution for existing shareholders. However, Unity expects to enter into capped call transactions with Option Counterparties to reduce the potential dilution to Unity's common stock upon any conversion of Notes and/or offset any cash payments Unity is required to make in excess of the principal amount of converted Notes, with such reduction and/or offset subject to a cap. This means that Unity is taking steps to mitigate the potential dilution to its common stock upon conversion of the Notes.

In connection with establishing their initial hedges of the capped call transactions, Unity expects the Option Counterparties or their respective affiliates will enter into various derivative transactions with respect to Unity’s common stock and/or purchase shares of Unity’s common stock concurrently with or shortly after the pricing of the Notes, including with, or from, as the case may be, certain investors in the Notes. This activity could increase (or reduce the size of any decrease in) the market price of Unity’s common stock or the Notes at that time. In addition, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to Unity’s common stock and/or purchasing or selling Unity’s common stock or other securities of Unity in secondary market transactions following the pricing of the Notes and prior to the maturity date of the Notes. This activity could also cause or avoid an increase or a decrease in the market price of Unity’s common stock or the Notes which could affect a noteholder’s ability to convert the Notes and, to the extent the activity occurs during any observation period related to a conversion of Notes, it could affect the number of shares, if any, and value of the consideration that a noteholder will receive upon conversion of its Notes.

In summary, Unity's upsized offering of convertible senior notes impacts its capital structure and financial flexibility in several ways, both in the short and long term. While the issuance of convertible senior notes increases Unity's debt obligations and debt-to-equity ratio, it also provides the company with additional financial flexibility to pursue growth opportunities and invest in its business. The capped call transactions and the repurchase of the 2026 Notes could help mitigate the potential dilution to Unity's common stock and improve its financial flexibility. However, the increased debt obligations may also limit Unity's financial flexibility, as it will need to allocate resources to service and repay its debt obligations. The potential benefits and risks associated with the conversion of these notes into common stock for both Unity and its shareholders are significant, and Unity is taking steps to mitigate the potential dilution to its common stock upon conversion of the Notes.