Vernimmen.com

Comment, question or quotation of the day

21-09-2024 : Vivendi, or the lenders who applaud a demerger with both hands

As a general rule, a demerger that reduces the diversity of a group's businesses is not well received by lenders, since their level of risk increases with the concentration of activities that results from a demerger. Indeed, the cash flows generated by each division of a group are naturally pooled within the group that combines them to service the latter's debt. Once split into independent entities, cash flows are naturally no longer mutualized, and the lenders of each of these now independent divisions can only rely on the cash flows generated by each division to service the debt allocated to it in the demerger.

As a result, lenders have long reserved the right to obtain early repayment of their loans/bonds at face value, or even slightly more, in the event of a demerger (or even in the event of a simple announcement).

When a phase of sharply rising interest rates pushes the value of bonds well below par, the subsequent announcement of a demerger is a godsend for lenders, who suddenly see the value of their bonds approaching par, despite a below-market rate of return on these loans. This is exactly what has been happening for several months with Vivendi bonds. A year ago, before any announcement of the demerger project, the 2016 bond maturing in 2026, yielding 1.875%, was quoted at 94.3% of par, due to a market rate of 4.10%. The bond is currently trading at over 99%, in anticipation of redemption at par by the end of the year, when the demerger is scheduled to take place. For a bond investor, a price increase of 7% in one year, including coupon, is considerable for a BBB-rated bond.

The demerger candidate must refinance its debts, i.e. negotiate with banks to take out loans that will be used to prepay the bonds. These bank loans are then allocated between the various entities to be demerged. Only when the demerger is complete can the demerged entities issue bonds to repay the bank loans set up as bridging loans. For Vivendi, this involves €2,750 million.

 

20-08-2024 : Do share buybacks boost share prices?

For those who might be tempted to answer yes to this question, despite the countless academic research papers that answer not significantly, here is a graph of the 10-year performance of the S&P 500 (in red) and the 100 components of this index that have bought back the most shares (S&P buyback, in blue), taken from La Lettre Vernimmen.net of July-August:

 

 

While the S&P 500 buyback returned, dividends reinvested, a return of 9% over 10 years, the S&P 500 returned 13%, and with less risk (standard deviation of daily returns 12% lower than that of the S&P 500 buyback). Why did this happen?

Because the aim of share buybacks is not to boost share prices, but simply to return to the financial markets, which financed the company making the buyback, equity that has become surplus, at least transitively, to its needs.

Admittedly, this graph is not intended to be scientific, but if share buy-backs were to push share prices upwards after 10 years, this should be visible in share prices!

The only source of value creation from buybacks is when the company is able to do so at a time when its share price is temporarily depressed and moving away from its intrinsic value.

Do share buybacks boost share prices?

 

For those who might be tempted to answer yes to this question, despite the countless academic research papers that answer not significantly, here is a graph of the 10-year performance of the S&P 500 (in red) and the 100 components of this index that have bought back the most shares (S&P buyback, in blue), taken from La Lettre Vernimmen.net of July-August:

 

 

 

 

While the S&P 500 buyback returned, dividends reinvested, a return of 9% over 10 years, the S&P 500 returned 13%, and with less risk (standard deviation of daily returns 12% lower than that of the S&P 500 buyback). Why did this happen?

 

Because the aim of share buybacks is not to boost share prices, but simply to return to the financial markets, which financed the company making the buyback, equity that has become surplus, at least transitively, to its needs.

 

Admittedly, this graph is not intended to be scientific, but if share buy-backs were to push share prices upwards after 10 years, this should be visible in share prices!

 

 The only source of value creation from buybacks is when the company is able to do so at a time when its share price is temporarily depressed and moving away from its intrinsic value.