Tuesday, 30 November 2010

"Seagate Technology Terminates Private Equity Discussions And Announces Share Repurchase Authorization"


Interesting the company instantly announced a share buyback, however the Raven is skeptical as to much many share will actually get bought back and when given that they intend to do it out of future cashflow. $2bn would be ~154mm shares, approx a third of the company!

Just for giggles where would that take the leverage of the firm? The Raven thinks its quite possible for their margins to fall to 15% then using 4yr average revenue and SGA, we're talking EBITDA of $1.3bn. Current assets cover long term debt and current liabilities currently, so leverage would be 1.5x still investment grade. but 10% margin and its 2.7 and we're getting to the covenant zone. Its not clear that its a lock either, there are strategic hurdles and a cash rich competitor, maybe levering up isn't the smartest trade.

So what are historical returns for announced huge buybacks?
Ok there aren't many companies that announce they're going to buy back a third of the company. Interpolating the stats isn't too easy, as two factors tend to drive returns, size of announcement and completion rates, which in this case are contradictory, top decile announcement size and probably lower quartile completion rate. Looks like about a 3% pop on the announcement, and another 5% over the year.

How much fat was on this puppy?
Punters are going to compare it to where WDC has traded, however its very clear that WDC priced in its own possible LBO on the back of the STX news, because taking a historical ratio of where they traded would indicate that STX was already at fair value to WDC before last nights announcement. Perhaps the trade on th open for the Raven will be to cover his very small STX short and sell some WDC, we shall as always check the price action at the time.

No comments:

Post a Comment