Collared accelerated share repurchase plans are finding increasing favor with cash-rich companies.
"A huge amount of cash is being deployed to buy back shares and many more companies are using structured solutions," said the head of one North American structuring desk. The collared ASR strategy is not new, but "The sheer increase in market volume of share buybacks has made it more pronounced."
ASRs have been around for a while and are simple derivative structures allowing companies to buy shares in bulk from banks, which are not limited by the Securities and Exchange Commission's Safe Harbor Rules on repurchase volume. Traditional ASRs involve banks selling companies forward contracts on borrowed shares, which they then buy at market value to cover their short position. The bank compares the open-market price with the upfront price and nets the difference with the company. Collars establishing floors and caps limiting companies' exposure to market price risk on ASRs have taken off as companies have been shoveling up shares.
The latest example comes from Wendy's International Inc., which late last month repurchased 3.75 million shares for approximately USD207 million in an ASR transaction subject to a future contingent-purchase price adjustment with floor and cap provisions. The counterparty on the trade could not be determined and messages left for Diane Greathouse, Wendy's assistant treasurer, were not returned by press time. Bob Bertini, spokesman for Wendy's, declined comment. Late November, VeriSign entered a 10.8 million-share, USD250 ASR with Morgan Stanley subject to a maximum-price cap for the future sell contract. "This is the first program we've done of this kind," said Nancy Fazioli, VeriSign's investor relations manager. She declined to discuss strategic considerations and Edison Andrade, the company's assistant treasurer, did not return phone messages by press time. Other recent collared ASRs according to public filings include NRG Energy, RadioShack, Louisiana Pacific Corp. and CIT Group.
