Shares of Greenhill & Co. (NYSE:GHL) are surging on Tuesday, trading higher by about 15% as of 11 a.m. EDT after the investment bank announced a recapitalization plan that would effectively allow it to buy out most of its minority public shareholders.
Under the plan, the company expects to issue $300 million of debt plus $20 million of equity, which will be used to refinance existing debt and buy back millions of shares of stock. The buyback will start with a tender offer to repurchase up to 9 million of stock at $17 per share.
Greenhill & Co. had about $80 million of bank debt as of June 30, 2017, which will be paid off with the $320 million of combined debt and equity raised under its recapitalization plan.
That leaves about $240 million of proceeds, net of debt repayment and before any offering costs and expenses. Greenhill & Co. indicated that it would first repurchase 9 million shares of stock through a tender offer at $17 per share, tying up about $153 million of the remaining cash. The company may buy back additional stock at a later time, perhaps through purchases on the open market, ultimately purchasing up to $235 million of stock.
Not surprisingly, shares quickly rallied to close the gap between the proposed tender price and the price at market close on Monday. As of 11 a.m., Greenhill stock trades at $16.62 per share, or a mere 2.2% discount to the $17 price at which it is expected shareholders will be able to tender their shares.
The recapitalization plan put forth by Greenhill & Co. will provide a lot of leverage on the struggling company's balance sheet. As a result, the company's dividend will be "substantially reduced or eliminated" in order to focus cash flow on debt repayment, and CEO Scott Bok will forgo 90% of his base salary for a five-year period beginning on January 2018. In exchange, Bok will receive $2.75 million of restricted stock units, further tying his personal fortunes to the success or failure of the company after the recapitalization.
It's a bold bet on the independent investment bank and advisory company, but the risk will be mostly borne by company insiders and key employees. Notably, management and key employees won't participate in the tender offer to sell their shares, and will hold on to their interests in the higher-levered company after the recapitalization, making this something of a levered buyout of the company's minority public shareholders.