Share buy-backs must be one of the most talked-about, most praised tools in the corporate restructuring kit. The Americans certainly like the strategy: in 1997 share buy-backs totalled $77 billion. But in Europe the hype has still to translate into reality. In the first 11 months of 1998 just $20.2 billion of stock was bought back, and $15 billion of that was generated by UK companies, according to figures from JP Morgan.
Not that you can blame the companies all of the time. Some chief executives might still think that to buy back shares is a tacit way of admitting that you have no new ideas for the company, but more and more are becoming aware of the positive effect a buy-back can have on share prices. The problem is either the legal framework, the tax treatment, or both.
This started to change last year, with France and Germany both changing the rules. In Germany, though, there was a seven-month gap between changing the legal framework in May and altering the tax treatment. As a result, those companies that wanted to buy back shares chose to wait, and a backlog began to build up.
Then came the next problem: how to do share buy-backs in a relatively illiquid stock market that is not used to the concept. The danger is that an announcement of intent could drive up the share price beyond the level at which it still makes sense to buy back the shares. Of course, it might please executives with stock options, but no-one else.
One way around this potential minefield was provided by Commerzbank, which reconfigured a structure used in the UK in the late 1980s, and renamed it the reverse bookbuilt share buy-back. "The idea is to use the equity capital markets and sales teams already in place for, for example, bookbuilding and selling an IPO, and using them to construct a book for the opposite, namely buying back the shares," says Anna Lemessany, the banker in Commerzbank's equity capital markets team responsible for share buy-backs.
One of the old hands from the glory days in the UK describes it as a "process of ringing up your mates and asking them if they want a piece of the action". But it's not that simple in Germany. "German law states that all shareholders must be treated equally," explains Lemessany. "So whether retail or institutional shareholders, holders of ordinary or preference shares, all have to be given an equal opportunity to participate in the offering."
The first company to use this tool was Kögel, an automotive component supplier with market capitalization of €46 million ($41.4 million). "Commerzbank already had a strong relationship with Kögel," says Lemessany. "So when we went in to see them on December 1 we were already discussing our ideas with Vorstand members. The management had been keen to do a share buy-back for a while, and proved to be very receptive to our idea." The decision to proceed came pretty rapidly, with the announcement made just two days later. "For a new concept that's rather unusual," says Lemessany. "But Kögel is a very progressive company, and has an impressive investor-relations programme especially for a Mittelstand company."
The first step Commerzbank took after being awarded the mandate was to put an advertisement in the German press announcing the buy-back and indicating the price range. The equity sales force was then briefed to be able to tell the story to major investors. Commerzbank's role as a custody house and retail bank helped ensure that retail investors were treated as equals. Bookbuilding lasted for a week and in the event 7.5% of Kögel's shares were bought back.
The next reverse bookbuilt share buy-back was at the end of January for Krones, which designs and manufactures packaging robots for bottling operations and has market capitalization of €286 million.
This time the process was made more difficult by the ownership structure. There were not just two types of shareholders, institutional and retail, but also two classes of shares, ordinary and preference, with different prices and liquidity.
"Again, we had to treat each class and holder equally, so we decided not to put any quotas in place," says Lemessany. "Instead we set up two price schedules with relative rankings. So if, for example, the preference shareholders were to show more enthusiasm they would get more of the allocation, but that wouldn't mean that the ordinary shareholders would be excluded."
But the reverse bookbuilt share buy-back is not the only route for German companies that are seeking to buy back equity. Schering, BASF, Agif and Stada have all bought back their own shares in the past two months, Stada bought only 1%.
But Commerzbank's system may be a useful variant for companies concerned about paying too much in a frothy stock market. "It's a good tool for markets which are new to such concepts or for companies where liquidity is not high," says Lemessany. "We've found that the idea has general appeal, but it does have to be tweaked to work effectively in different jurisdictions."Antony Currie