US groups borrow to pay out to investors

US groups borrow to pay out to investors
By Richard Beales and Francesco Guerrera in New York
Copyright The Financial Times Limited 2007
Published: July 1 2007 18:34 | Last updated: July 1 2007 18:34


Some US companies are starting to take on more debt in order to pay it out to shareholders – a response to rampant leveraged buy-outs and activist investors.

The moves, while still unusual, could herald a gradual shift among publicly listed companies towards more aggressive capital structures.

Recent announcements include home improvement retailer Home Depot’s intention to borrow $12bn to help finance a $22.5bn share buy-back and plans at Expedia, the online travel agent, to spend $3.5bn buying back 42 per cent of its shares – funding part of the buy-back with debt.

Tobias Levkovich, chief US equity strategist at Citigroup, said such announcements could be early indications of a change in attitude. “The bottom line is that managements are starting to look at this more aggressively,” he said. “Shareholders, particularly in the large-cap world, are getting more frustrated.”

He said even if the jittery credit conditions of recent weeks continued, making debt more expensive, companies could still afford to borrow more. “They’re hurting their returns by being so under-levered.”

The latest round of borrowing is aimed at funding returns to shareholders rather than more traditional capital or research investment.

Edward Marrinan, head of credit strategy at JPMorgan, said that some recent moves to return cash to shareholders were aimed at staving off activist investors.

“Management understandably wants to retain as much control over their own company’s destiny as possible,” he said.

Home Depot’s proposed buy-back is one of the largest in US corporate history. Carol Tome, chief financial officer, told Wall Street analysts that increased indebtedness was justified to keep rewarding shareholders in the face of slower growth in profits and sales.

She said. “As a maturing company our financing strategy is evolving to one that facilitates capital distribution.”

Ms Tome said Home Depot, whose previous chief executive Robert Nardelli stepped down in January amid a controversy over his compensation and treatment of shareholders, would accept a downgrade by credit agencies as a result of its heavier debt load provided that it retained an investment grade rating.

In spite of such evidence, some analysts say the limited shift to gear up and reward shareholders with the proceeds will be restricted to specific cases where the threat of noisy activism or private equity attention has forced action.