Capital Markets

Banks Back Buyback Boom

A slew of companies tapped Wall Street in August for help buying back shares through accelerated repurchase programs.
Stephen TaubAugust 31, 2007

Dollar Tree Stores is the latest company to tap Wall Street and money-center banks for assistance in buying back shares via an accelerated stock-repurchase program. Earlier this month, Clorox, Grainger, Parker Hannifin, and Polaris Industries all took similar steps.

Under accelerated repurchase programs, a company buys back shares immediately from a bank, which borrows the shares it sells to the company. The bank then purchases shares over time in the open market to settle its borrowings. The company’s repurchase is typically subject to a financial adjustment based on the volume-weighted average price, less a discount, of the shares the bank subsequently buys during the repurchase period. The minimum and maximum price and number of shares to be repurchased under such an agreement are typically set by a collar.

Dollar Tree says its agreement with Merrill Lynch will result in the repurchase of about $100 million of its common shares under an accelerated share-repurchase program. The retailer said it will acquire the shares under a $500 million share-repurchase program announced on November 21, 2006. Once the transaction is completed, the company will have about $98 million remaining in future authorized share repurchases. This is Dollar Tree’s third accelerated share-repurchase program since December 2006.

Under the agreement, Dollar Tree will immediately pay $100 million, and then will initially receive about 1.6 million shares, based on a calculation of roughly 70 percent of the top end of the collar. It will receive the additional shares by the end of an estimated 1- to 4.5-month period anticipated to complete the transaction, depending on market conditions. All of the repurchased shares will be retired by the company.

“We believe share repurchase, facilitated in part by accelerated share-repurchase programs, is an efficient use of capital that provides long term benefit to our shareholders,” says president and CEO Bob Sasser.

In late July, the company completed its second accelerated program for $150 million, announced on March 29, 2007; that was followed by $75 million of open-market purchases completed in early August under a 10b-5-1 plan.

On August 13, The Clorox Co. said it had entered into an accelerated share-repurchase agreement with Citibank and JP Morgan Chase Bank. Under the agreement, Clorox repurchased $750 million in shares under its previously board-authorized $750 million stock-repurchase program at an initial repurchase price of $59.59 per share. Final settlement of the Clorox repurchase program is scheduled for no later than January 24, 2008: it may occur earlier under certain circumstances, the company said.

The final number of shares Clorox is repurchasing under the terms of the agreement and the timing of the final settlement will depend on prevailing market conditions, the final discounted volume-weighted average share price over the term of the repurchase program, and any other customary adjustments, the company explained.

On August 20, Grainger announced it had entered into an accelerated share-repurchase agreement with Goldman, Sachs to purchase $500 million of its stock, with the majority of the shares received immediately. The exact number of shares bought back will be determined at the conclusion of the agreement, which could take up to eight months to complete, the company added.

The industrial distributor stressed it does not expect to make any additional share repurchases until the program concludes. It said it expects to fund about half of this purchase with existing cash and the rest with short-term borrowings.

Parker Hannifin also recently announced a $500 million accelerated share repurchase. The announcement came at the same time it announced a 21.2 percent increase in its quarterly cash dividend and a 3-for-2 stock split. The company said it will initially repurchase shares of its stock from Morgan Stanley. The investment bank will then purchase an equivalent number of shares of Parker stock in the open market over a period of up to four months. At the end of that period, additional shares may be delivered to the company based on the volume-weighted average price of its common stock during the same period. Repurchases will be funded using existing available credit, and the shares will initially be held as treasury stock, the company added.

Parker also pointed out that the authorization is in addition to its previously announced share-repurchase program, under which approximately 9.5 million shares remain available for repurchase on a presplit basis.

Meanwhile, Polaris Industries recently announced it had paid a $13 million purchase-price adjustment under its accelerated share-repurchase agreement with Goldman, Sachs. On December 8, 2006, Polaris announced it had repurchased 3.55 million of its shares at an initial purchase price of approximately $165.6 million, or $46.64 per share. Goldman borrowed shares in connection with the delivery of the 3.55 million repurchased shares to Polaris in December 2006 and then purchased sufficient shares in the open market to return to lenders.

The accelerated share-repurchase program was subject to a purchase-price adjustment at the completion of the program based on an adjusted weighted average price of Polaris common stock calculated under the company’s agreement with Goldman that was payable by Polaris in cash or shares of its common stock. Polaris said it paid the price adjustment to Goldman in cash.