From leveraged buy-outs to leveraged buy-backs

While tremors ripple still across the financial pond, in re CDOs, leveraged debt investments, etc. word comes of a record-breaking leveraged buyout in Canada (parenthetical statements are mine).

BCE, the Canadian telecommunications group, has agreed to a CAD34.8bn (USD32.6bn) cash buyout by a group that includes the Ontario Teachers Pension Plan (“Retirement security tomorrow”) and two US private-equity groups, Providence Equity (“We paid for James Bond) and Madison Dearborn (they look really boring).

Of the USD32.6bn being put up for BCE, USD15.9bn is debt, itself lined up with a banking syndicate. Sound messy enough, yet? According to BCE chairman Richard Currie it will create value for their shareholders. If only they could figure out ownership of the company, now…

Share re-purchasing on the increase

The buy-out story is – as is common, for me – not the point. The interesting story is its sort-of counterpart: a recent run of leveraged share buy-backs. The Home Depot, as an excellent exemplar, is borrowing some USD12bn to help pay for a USD22.5bn buy-back of its own shares (I know, I know, who else’s shares would they buy back? Shut up). Expedia is going in for a USD3.5bn buy-back (42% of its shares outstanding) – also with the help of borrowing. And BHP Billiton, Toyota…it’s a long list.

The motives for this are mixed. Toyota has been at this since 1997, and it’s generally to shore up its market capitalisation (buying back shares takes them off the market, increasing the ownership and value inherent in the shares that remain outstanding). In the case of the Home Depot,

Home Depot’s proposed buy-back is one of the largest in US corporate history. Carol Tome, chief financial officer, told Wall Street analysts that increased indebtedness was justified to keep rewarding shareholders in the face of slower growth in profits and sales.

It is actually the 5th-largest. There are other-indicating signals. Last week (or so) they agreed to a USD10bn deal to sell their supply division – giving them the other half (or so) of the cash required for the buy-back. The supply unit, by the by, when to a group of 3 equity firms.

This move gives The Home Depot’s board (and the board of any other company doing the same) more power, buys out (hopefully) so-called ‘activitst’ shareholders, and increases the value of the shares held by whomever is left. A bit aggressive, but it secures for the board a greater hand in decision-making. They’re planning on yet more capital expenditure this year, even as sales are slowing with housing. It won’t be likely to deliver great returns for shareholders, but if you can buy those people out now, all well and good.

There’s an interesting article about the relative merits of buy-backs over at Investopedia, which I recommend. It becomes an interesting exercise, with private equity Baby Huey-ing through the corporate and financial landscape, to follow the actions of publicly-listed companies and sift out the motives – board control, debt consolidation, various financial ratios (there probably isn’t much excess capital floating around public companies these days), even keep private equity itself at a distance. Bloody exciting.


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