God bless the Dutch, to whom we owe such riches: art by Van Gogh, history by Mata Hari, mania by tulips, lingerie by Marlies Dekkers and of course the buttery but elusive petite Hollandaise. And in finance, let us not forget the reverse Dutch auction, friend of investors everywhere.
Or is it? Judging from the few that have transpired lately, these deals are more like trees falling in an empty forest. No one seems to hear them. Or care much anyway.
A reverse Dutch auction has many sellers and one buyer. The price of the sale goes up - within a range - until sellers (shareholders) agree to tender to the buyer (the company). A few small companies bloated with cash have tried to use them to prop up their withered share price with at best mixed results, so far anyway. Investors should take note, though, because eventually these auctions will reap rewards.
Case in point: Cash Store Financial, an Edmonton-based payday loan shop. Last fiscal year, under a normal course issuer bid, the company bought back 1.2 million shares. In the first few months of fiscal '09 (which started July 1), the treasury hoovered another 1.3 million shares, the maximum allowed under the renewed issuer bid.
So management initiated a special buyback, Dutch style, with an eye on retiring another 1.5 million shares, or 8 per cent of the capital. The results were due out yesterday, but chief executive officer Gordon Reykdal, who is categorically not Dutch, was confident he would get all the stock he could. And, as the owner of four million shares himself, he was quite pleased because his ownership of the company has increased to about 22 per cent.
So why would shareholders tender to this bid when the CEO, who presumably knows the business better than anyone and who has the bulk of his wealth tied to it, is effectively increasing his stake? Maybe they disagree with the prospects for payday loans. Mr. Reykdal, though, is sanguine: "We don't think we'll be materially impacted," by the downturn. "We might even be slightly better off, although it's too early to say."
Or maybe investors just need the cash for margin calls. Whatever the answer, the CEO thinks the stock is cheap and he's putting his - and other investors' - money where his thoughts lie, raising his stake. "And I'm doing it all tax-free," he adds with a laugh, referring to the advantage of a buyback compared with paying dividends.
To put some numbers on the case, Cash Store ended fiscal 2008 with a bank balance of about $16-million and no debt. By the six-month mark of fiscal '09 it should have more than a buck a share in cash despite paying dividends (the yield is 4.4 per cent) and buying back all that stock. They should change the name to Cash Cow.
As for the share price, it's up nicely on the year, but subtract the cash and the shares look like a bargoon.
And it's not the only company that thinks its own stock is a good investment. Exfo Electro-Optical Engineering has a long name and a lot of cash. It had even more before buying back about eight million shares, or a quarter of the public float. Exfo too is run by a CEO with a lot of his wealth tied to the fortunes of the business. He is confident. Investors less so. Would they rather he hoard cash in case of a calamity? According to TD Newcrest, Exfo will still have $1.11 a share in cash and looks interesting despite the risks. And the normal buyback continues.
These buybacks imply that management has a lot of confidence. Yet the stocks still look cheap. Sure, if things get worse and pink slips start to fly - and I don't mean Dutch lingerie - the buybacks might prove a mistake. But who knows best? My money is with management.
*****
Taking stock
Exfo Electro-Optical Engin. (EXFO-NASDAQ)
Yesterday's close $3.15, up 16¢
Cash Store Financial Services (CSF-TSX)
Yesterday's close $5.76, down 14¢
THE GLOBE AND MAIL // SOURCE: THOMSON DATASTREAM
© The Globe and Mail
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