Tesco has begun a programme to buy back shares with a value of up to £500m, a move some analysts have suggested is designed to boost its share price to ward off potential private equity interest in the wake of CD&R’s takeover of Morrisons.
Alongside strong half-year results earlier this month, Tesco said it could afford to start a multi-year share buyback after cutting net debt by £1.7bn since February.
The retailer’s CEO Ken Murphy denied at the time that it was a defensive move, adding: “This is part of a very clear policy and is the result of the very strong cash flow we’ve generated and we’ve spoken to shareholders for some time about the possibility of buybacks when our debt ratios and our cash flow permitted.”
Shares in Tesco have been the weakest performers amongst the UK’s three listed food retailers so far this year, rising only 10% before its recent results statement, despite its growing operational momentum.
In contrast, shares in Sainsbury’s have gained over 30%, whilst Morrisons have been driven up more than 60% due to the takeover battle.
One reason Tesco’s good sales and profit performance has not boosted its shares is that the company, with a market value greater than Morrisons and Sainsbury’s combined, is regarded by many as being too big for a private equity takeover.
“It would be a big deal, although such is the liquidity out there, it is possible,” said Clive Black, research director at Shore Capital, last month. “But the market is putting a pretty low probability on it”.
NAM Implications:
- This initiative raises the issue of how many companies (retailers and suppliers) are supporting their prices in this way…
- …in an environment that should be depressing share prices.
- i.e. can it go on, before a re-set is required…
- Meanwhile, Tesco remains a very expensive and large (too large?) takeover option.
