The share repurchase trend has been spreading to Europe and Asia
With the US parading share buy-backs on its corporate finance catwalk, Europe and Asia have been waking up to the latest fashion in shareholder value. Nowhere more so than in the UK where the financial media have been strutting their share repurchase stuff and, in some cases even imposing the new design on unwilling models.
Take Imperial Chemical Industries (ICI) which announced its results at the end of February. Details of an 85 per cent increase in pre-tax profit and low gearing were released showing the company with an under-utilised balance sheet. ICI then said that it might 'consider' a share buy-back, although there were tax disincentives in the UK. Other options, such as acquisitions, were not being ruled out.
The following day's headlines focused on the share buy-back story which Barbara Winguard, head of UK investor relations, says were out of proportion. Share buy-backs are 'never off the agenda', they just happen to be in vogue at the moment and the press leapt on the story.
Whether that vogue is down to cyclical patterns, a cultural awakening to shareholder value or straight 'talk of the town' is difficult to say. High profile cases have certainly helped alert the media to the buy-back story. Forte used the mechanism in its defence against Granada; and National Power and PowerGen made repurchases to help create demand tension in their offers last year.
Buy-backs aren't a new phenomenon in the UK, of course; several companies have used repurchases as a means of handing back value to shareholders in the past. Reuters' programme is one of the most notable examples in recent years. In November 1993 the news and financial information group completed a repurchase of 25 mn shares, paying around 350 mn to its US and UK shareholders in the process.
Mike Cooling, head of investor relations at Reuters, says that the company was careful to explain that the surplus funds were also surplus to the requirements of the ongoing business; and that other options - such as development of new products and acquisitions - had been looked at. Cooling stresses the fact that there's no point in buying companies just for the sake of doing so; he believes that in Reuters case the market generally recognised there were sufficient reasons for going ahead with the buy-back. 'The investor must genuinely believe that this is the right move,' he says.
Before the buy-back Reuters had been engaged in negotiations with the UK tax authorities and with the SEC in the US to ensure there was a beneficial tax regime available. Rob Rowley, Reuters' finance director, expressed his dismay towards the end of last year that no UK company 'appears to have been able to do the same without tax impediments and shareholders sit amid a fog of uncertainty over current Inland Revenue attitudes.'
Reuters is currently involved in further representations to the UK authorities to rectify that position - with a shift from advance corporation tax to capital gains tax being one simplifying remedy. In the meantime, Cooling does not rule out further buy-backs in the future. 'We're constantly looking at ways of returning cash to shareholders,' he says. 'We just want to manage the process in an efficient way - efficient for the company and the shareholders.'
Boots also went down the buy-back track a year later, in November 1994. Terry Steel, director of investor relations for the healthcare/cosmetics retailer and manufacturer, says that it was a natural path for the company to take. 'The whole motivation of Boots' management is creating shareholder value - but that's a term which is greatly misunderstood. Shareholders do not always focus on just how much value is destroyed through not having an efficient capital structure.'
Steel says that Boots' 500 mn buy-back had been planned for almost two years and that with management dedicated to maximising long-term cash generation, the company often has surplus cash. Buy-backs were viewed as a more tax efficient way of returning value to shareholders than increasing the dividend.
'Other companies have paid special dividends but we don't think that is fair to the higher tax rate shareholders,' says Steel. 'You can't please all the people all the time but the majority of people welcomed the move. Buy-backs are now going down very well in the City. There's been a change in the last few years in how they look at cash - and that's a positive change,' he adds.
That cultural shift is also noted by David Manning, securities investment director at the Electricity Supply Nominees. Whereas US companies have understood the drawbacks of excessive equity when cash-rich, the UK is only just beginning to come to terms with the idea. Share buy-backs are just one of the outcomes. Manning believes that increased performance pressures in the board room - encouraged by share option schemes - have helped to concentrate the minds of directors on delivering value.
'One of the advantages of buy-backs is that they start to retire extremely expensive capital,' adds Manning. 'You're retiring equity on which you no longer have to pay expensive dividends. It's not a bad discipline to pay cash back to shareholders rather than increase dividends which may burden the company for years to come.'
But not everyone is wholly convinced. Paul Emerton, research manager at corporate governance agency Manifest, says that a degree of scepticism remains in some quarters of the market due to the perception that companies have nothing better to do with their money. Yes, there are positive aspects, he says: excess capital is ploughed back to shareholders; EPS can be enhanced; and the buy-back can have taxation benefits. But it's also necessary to consider the downside: the need to use distributable funds; the increase in gearing leading to a perception of more risk, to name just two. 'Each buy-back has to be considered carefully on its individual merits,' says Emerton.
Ann Simpson, managing director at Pirc, the UK governance advisory firm, adds that companies should consider their long-term needs as well as any short-term gains from handing back cash. 'Our main concern is always the alternative opportunities which may fall by the way-side. For many of the utilities it was just a short-term means of boosting the share price,' she says. Simpson also voices concern that buy-backs are not advocated for the sole reason of landing hefty bonuses in the pockets of directors due to their executive option schemes.
These fears are brushed aside by Elizabeth Wade, head of investor relations at Barclays Bank. Like many in the sector, Barclays is cash-rich at the moment and it bought back approximately 2.5 per cent of its capital base in late February. National Westminster is currently considering its options to go down a similar route.
'Basically, we're in the business of active management of our capital base,' says Wade. 'Historically, when banks had a lot of excess capital they would waste it, either by foolish acquisitions or by competing away the margins on lending. Barclays was probably a victim of that in the late 1980s. The current management recognises that when you have capital over and above the business requirements you should consider giving it back to shareholders.'
It's not just the UK which has been taking part in the buy-back revolution, though. Continental European companies may still be deemed to be lagging behind their Anglo-Saxon counterparts in shareholder value terms, but a select few have paid their respects to buy-backs - despite regulatory and taxation obstacles.
Pierre-Henri Leroy at proxy voting advisers Proxinvest in Paris points to the recent move by Parfinance, the Paribas holding company, and confirms that Rhne-Poulenc has substantially bought back its non-voting stock in the past. An extraordinary meeting or special assembly is necessary in order to gain permission to restructure capital and the idea remains an anathema to the majority of French companies.
Not so for Aimery Langlois-Meurinne, vice president at Parfinance, who views the company's Ffr2.5 bn buy-back scheme announced in February as a logical step. He says that the company's aim is to create value over time and that means thinking about the needs of shareholders. 'Most of our shareholders outside the controlling group are French insurance companies,' explains Langlois-Meurinne. 'They have a big thirst for cash and have been hit hard by the real estate crisis. They also have too much in equity and not enough in bonds. Most have indicated they will tender their shares. Any other shareholder has a choice: either they want out or they can wait to see an increase in the net asset value.'
However despite his enthusiasm for Parfinance's repurchase, Langlois-Meurinne acknowledges that the legal and taxation system in France limits the opportunities for buy-backs.
Complaints about those limitations are echoed across the continent. Geneva-based financier Andr Baladi says he has been banging the buy-back drum for many years - most notably with regard to Nestl - but few Swiss companies are tuned in to the beat. He cites the security firm SGS, Banque Unigestion and chemicals company Ems-Chemie as being among the limited number of Swiss companies which have taken this route to create shareholder value.
Few companies will negotiate with the tax authorities to eliminate the obstacles, says Baladi, 'but that should not prevent them. The reason is that the majority of executives are not stockholders so there is no incentive for them to act.'
Signs of an awakening to share buy-backs are beginning to be seen in other European countries, though. Take Denmark, where repurchases of own stock are permitted - although you'd have been hard-pressed to notice it in the past. Jeremy Gaston, an analyst at Enskilda Securities, says that the very fact that the traditionally conservative banks are no longer 'denying' that they are considering the possibility of buy-backs is a step in the right direction.
Gaston also points to Sweden which is currently in the midst of pushing through reforms to allow buy-backs. Proposals currently under discussion would allow companies to repurchase up to 10 per cent of their outstanding capital as from January 1 1997 - as long as the shares are then cancelled. Pressure for a change in the regulations has come from over-capitalised companies which are trading below value. 'They've had an excess of cash for many years,' says Gaston. 'They're happy when interest rates are high but when they're low it's a big problem.'
In the Asia Pacific region pressure on regulators to create a buy-back friendly atmosphere has also paid dividends, so to speak. The Japanese government suspended taxes on share buy-backs in the middle of last year as part of a package of measures designed to give the lacklustre stock market a kick start. A number of companies have announced plans to take advantage of the new regulations including the brewing group Asahi and Toyota Motors.
Political worries have been the mainstay behind a spate of buy-backs in Hong Kong, reports Tai Fook Securities. Companies such as National Electronics and Harbour Ring have resorted to repurchasing their own shares due to a reluctance to invest in new business in the run-up to 1997.
Political problems of a different nature have been behind another ground-breaking repurchase plan in Korea. Daewoo Corporation announced it was going to buy back just under 5 per cent of its outstanding share capital in February with the aim of boosting its share price. Daewoo's shares had been on a downward slide since last November when its chairman, Kim Woo- Choong became embroiled in the political scandal surrounding the former South Korean president Roh Tae-Woo. With Kim on trial, the buy-back was deemed a good measure to help restore shareholder confidence in the company.
Whether that confidence is translated into value remains to be seen. One thing is certain: the theory that reducing the supply of shares on the market will automatically lead to a rise in the share price does not hold true. Shareholder value is not created by one buy-back. But, if few other tempting options beckon, it could well be a long-term step in the right direction.