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Increasing use of buybacks to appease activists

 

Source: The Wall Street Journal MoneyBeat, February 10, 2014 article

THE WALL STREET JOURNAL   |

 MARKETS & FINANCE



6:59 pm
Feb 10, 2014

Deals

Helen of Troy: Another Activist Strikes, Buybacks Follow

 

By Maureen Farrell

Less than a week after an activist shareholder pushed consumer products company Helen of Troy to “maximize value for [its] shareholders,” Helen of Troy Ltd. responded with a big, bold plan to buy back roughly 29% of its stock.

Such is the cycle of life for companies these days: An activist investor begins agitating, and the company quickly responds with a buyback or circles the wagons with a poison pill.

It’s not just the brand-name activists like Carl Icahn, Dan Loeb and Bill Ackman that are forcing companies to respond. Small funds with small stakes are also getting things done.

Sachem Head Capital Management is the latest to pounce. The firm, which was founded in July 2013 and has roughly $1 billion under management, recently acquired 1.2 million shares in Helen of Troy, a 3.7% stake, and has been pushing the company to sell.

In a letter to Helen of Troy’s board of directors released on Feb. 4, Sachem Head urged the company to run an auction process. Should the right buyer fail to materialize, the fund said that Helen of Troy should then consider other ways to optimize its balance sheet.

Shares of Helen of Troy have risen more than 60% over the past year.

Instead of kicking off a sales process, Helen of Troy announced on Monday morning that it would repurchase $550 million of its stock, or 29% of its shares outstanding. The company said it would conduct a modified “Dutch auction” for $300 million of those shares immediately, and would repurchase the rest over the next three years.

Such a massive buyback had been in the works long before Sachem Head started publicly calling for changes, said a person close to the company. J.P. Morgan is advising Helen of Troy on these buybacks, the person said.

A spokesman for Sachem Head wouldn’t comment on Helen of Troy’s decision, but simply referred back to the firm’s letter last week.

Shares closed up 7.1% at $63.56 on more than three times the stock’s average trading volume.

The question now is whether these buybacks can keep Sachem Head and other potential activists at bay. Helen of Troy didn’t directly follow Sachem Head’s directives.

Still, buybacks appear to be a powerful defense mechanism, as they typically boost a company’s share price. Activists’ arguments carry less weight when a company’s stock price is popping.

Mr. Icahn agitated for $150 billion in buybacks at Apple Inc. and then lowered his demands to $50 billion. Apple didn’t follow Mr. Icahn’s recommendations, but came close enough that Mr. Icahn was willing to concede.

 

Copyright ©2014 Dow Jones & Company, Inc.

 

 

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