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WHEN SHOULD A COMPANY BUY BACK ITS SHARES?

28 Nov KWV Holdings

KWV’s share buy-back exercise will reignite the debate about whether shareholders really benefit from open market forays.

SHARE buy-backs remain a most contentious issue among discerning investors. Some companies, like commodities giant Glencore and British American Tobacco (BAT), have until very recently applied blanket buy-back strategies, effectively mopping up shares on the open market every day outside closed trading periods.

Is this an effective or an iffy strategy? Only time will tell, though BAT can probably already feel satisfied with its effort. Others prefer to time their share buy-back forays for periods when directors perceive considerable value in the share.

Sometimes these backfire horribly, and readers may remember mining conglomerate Anglo American’s costly share repurchase programme from a few years back.

Theoretically, when the shares acquired are eventually retired, a share buy-back should enhance earnings by shrinking the pool of stock that participates in bottom-line profits.

But there are investors who feel that rather than dabbling in share purchases, companies should stick to operational matters and return excess capital to shareholders, who can decide whether they want to accumulate more shares or not.

My opinion is that share buy-backs can be compelling when it’s pretty damned obvious the scrip on offer represents great value. I recall how Mazor, a claddings specialist, smartly snapped up a slew of shares at a time when the market took a more cynical view of its prospects, only to on-sell these shares at a considerable profit to a strategic investor for a remarkable short-term gain. There certainly should be something to glean about longer-term prospects from a company’s willingness to acquire shares on the open market, especially if prices have buckled.

So with this in mind, I was rather encouraged to note that my very favourite unlisted liquor company, KWV, which has its shares accommodated on an OTC (over-the-counter) trading platform, had spent R4.3-million during August on acquiring 536 716 treasury shares.

By my calculations this means KWV paid on average around 800c/share — a prudent exercise, considering the company (rich in property, brandy stock and an art collection to die for) holds a hard net asset value of over R18/share. But I suspect the well-intended share buy-back might raise the hackles of some of the more vociferous KWV shareholders.

Readers might recall that between July and September Niveus, the majority shareholder in KWV, increased its holding in the liquor company from 52% to 57.17% after mopping up shares on the open market between July and September. Niveus paid R11.9-million for the additional KWV shares, which implies an average price of roughly 665c/share.

The contentious issue around these transactions is that Niveus acquired the bargain-priced shares in the lull that followed a Financial Services Board directive around unlisted share trading. The Financial Services Board ruling effectively halted formal OTC trading, and perhaps the lack of clarity around future transactions spooked some shareholders into parting with the shares at such a paltry price.

KWV was quoted at 780c in late July, before the temporary trading halt took effect.

In retrospect, KWV shareholders may well be justified in asking why Niveus, rather than their own company, was ready to scoop up shares opportunistically during the trading lull.

In reality, KWV has bought back more shares, which are considerably more expensive than those that were available between July and September. How exactly the boards of Niveus and KWV decided when each entity would trade in the OTC market would offer a fascinating insight on the inner workings between holding company and subsidiary.

At the time of going to press, I did notice a conspicuous weakening in KWV’s OTC share price. All of a sudden there appear to be sellers offering over 80 000 shares at 750c-780c. That’s a fair bit of scrip. I was under the impression that the remaining minority shareholders in KWV would not sell out too easily. So will KWV or Niveus snap up these well-priced parcels?

Source: Rand Daily Mail – Marc Hasenfuss