Has MMI run out of plans to grow its business?
Concerns that share buyback means partial liquidation
MMI shareholders should be deeply concerned by management’s confirmation that it has indeed run out of plans to grow its business and has started to implement a partial liquidation of the company.
“Partial liquidation” is how one leading academic described share buybacks, which in MMI’s case is being touted as a really clever way of scoring R500-million on the current discount between the group’s share price of around R21.40 and its embedded value of R27.05. Because of the discount it believes the buyback “is the most efficient use of capital and will enhance value to shareholders”.
The company says the decision to spend R2-billion buying up its own shares, instead of paying a dividend, is a way of distributing capital to shareholders. That’s a bit confusing because after the distribution they will no longer be shareholders.
Many in the market, including analysts, think share buybacks are a great idea and an essential tool in the capital management kit. Of course anything that gives a lift to trading activity will generally be welcomed by the market.But it is difficult to imagine how trading against its own shareholders is a great way for a company to spend its cash. Over the next 12 months MMI shareholders may wonder if the buyer behind their proposed sale is an investor or management? They will have to feel secure that any company buybacks are triggered by an automated process and not by some upcoming development.
There is also the issue of the implicit unfair treatment of shareholders involved in share buybacks. A lot of institutional investors don’t have to pay tax on share sales. This means a buyback programme is significantly more attractive to them than it is to the taxpaying shareholders. A dividend payment treats both parties equally.
Buybacks in general smack of an unhealthy obsession with the share price. This is particularly disturbing in an era when the decision-making executives have a lot of their wealth tied up in the short-term performance of their company’s share price.