The curse of the share buyback has struck again. Glencore has become the latest company to spend hundreds of millions of pounds buying back its own shares only to find that it really could have done with the cash after all.
Ivan Glasenberg, the mining giant’s chief executive, launched a $1bn (£654m) buyback last year, claiming he wanted Glencore to avoid having a “lazy” balance sheet. Well, he certainly made sure he has plenty of work to do.
The company has announced it will sell $2.5bn of new shares, suspend dividend payments, halt operations at two African mines and sell assets in order to reduce its net debt by roughly $10bn.
Given that Glencore makes its money from playing markets, the share buyback and the equity issue are a spectacularly bad advert for its abilities.
Other recent ill-timed buybacks include Marks & Spencer committing to spend £600m in 2008, just weeks before a major profits warning, and Morrisons announcing a £1bn buyback in 2011 before most of the supermarket sector went into meltdown.
Too often, buybacks are used to flatter the underlying performance of a business – which they achieve by boosting earnings per share and shareholder returns. When a chief executive cannot find more useful things to do with cash other than return it to investors, serious questions should be asked.
Glencore spent most of its $1bn before last December when the company’s shares traded between 280p and 330p. They now stand at just 131.80p, even after rallying 7% on Monday.
The surge was partly a relief rally as investors backed Glasenberg’s plan, but it was also caused by hedge funds cashing in their winnings after betting against Glencore.
Four hedge funds – Davidson Kempner European Partners, Lansdowne Partners, Passport Capital, and Sunrise Partners – have made serious money by short selling 3.5% of Glencore between them.
Their bet shows that plenty in the City were already concerned about Glencore’s finances when, only three weeks ago, Glasenberg confirmed an interim dividend worth almost $800m.
Glasenberg and his finance director, Steven Kalmin, said “recent stakeholder engagement” since then had persuaded the Glencore management to act.
Their next decision is how to raise the $2.5bn. The size of the equity issue has been chosen deliberately so that it is less than 10% of Glencore’s existing shares in issue, which is the threshold for a placing. However, a placing would ignore the pre-emption rights of existing investors. A rights issue is the most likely option because that would allow Glencore’s current shareholders to avoid being diluted, while a debt for equity swap is surely the nuclear option.
At least Glencore shareholders know that Glasenberg, who owns more than 8% of the company himself, is also feeling their pain.
Tesco is bruised by Homeplus sale
Mike Tyson was not particularly renowned for his eloquent prose. However, the former US boxer is responsible for a quote that neatly dismisses the growing obsession with strategy in sport, politics and business.
Asked whether he was worried about an opponent’s detailed strategy to defeat him, Tyson said: “Everybody has a plan until they get punched in the mouth.”
Tesco, Britain’s biggest retailer, could surely relate to that. The grocer’s decision to sell Homeplus, its South Korean business, is not rooted in deep strategic thinking. Instead, Tesco simply needs to raise a lot of cash. Selling Homeplus was the quickest route to doing it.
There is little to celebrate about watching one of Britain’s leading companies rein in its international ambitions. Homeplus was arguably Tesco’s biggest overseas success. It was certainly the most profitable.
However, following a slump in group profits and a high-profile accounting scandal – the punch in the mouth in this case – Tesco has been forced to flog the business. Sir Terry Leahy spent years talking about Tesco becoming a global business and how it was reducing its reliance on the UK. Now, the company’s overseas ambitions have been undone by failure at home.
On the plus side, Tesco has raised a much-needed £4bn as it tries to pay off £22bn of debt, including the pension deficit and leases. However, rating agencies Moody’s and Standard & Poor’s have already warned that the sale will not lead to Tesco’s junk credit rating being upgraded.
This is because Tesco is selling off profits as well as assets. Trading has got tougher for Tesco in South Korea due to new restrictions on when its stores can open on Sundays. But still, Homeplus’s profit margins have consistently been the highest in the group and last year were 5.4%, compared with 1.1% in the UK. The deal will therefore lower Tesco’s earnings per share and result in the company booking a loss of £150m in its next accounts.
The financial consequences of the deal show the lack of strategic logic. The sale of Homeplus won’t even knock out Tesco’s problems.
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