Shares of GrafTech International (NYSE:EAF) fell more than 10% at the open on Thursday after the company said its majority shareholder was distributing part of its holdings. That's going to increase the number of shares available for trading, which could put near-term pressure on the shares.
In a statement late Wednesday, GrafTech, a manufacturer of graphite electrodes used in steel production, said that a consortium led by Brookfield Business Partners (NYSE:BBU) has distributed a portion of its shares. The move increases the public float -- the number of shares available for trade -- by 26.8 million, meaning the company's float is now about 35% of shares outstanding from 25%.
Brookfield took GrafTech private in August 2015 and returned it to the public markets in April 2018 via an initial public offering (IPO). Since the IPO, the company has remained GrafTech's majority shareholder, and still holds a 65% ownership interest even after the latest distribution.
Majority holders are a mixed blessing for a public company. In one sense, Brookfield provides GrafTech with stability and the ability to plan for the long term. That's come in handy amid recent market conditions, with GrafTech feeling a strain due to the COVID-19 pandemic and its impact on industrial production and steel demand.
On the other hand, investors must constantly live with the fear that the majority owner will eventually liquidate its shares. At best, that creates a downward pressure because there are more shares available to buyers. At worst, it can sometimes be taken as a sign the large owner believes the stock is overvalued.
GrafTech shareholders have experienced the downside before. Shares plummeted in early 2019 after Brookfield sold off a portion of its holding.
Investors need to understand that Brookfield is in the business of generating returns for its investors, and at some point will look to monetize its stake. So far, the company has done so in a slow, orderly fashion that shows no sign it is losing faith in GrafTech, and showing that it is cognizant of the short-term damage that can result from a large sell-off.
For long-term holders, there is a lot to like about GrafTech. The company's products are a key component of electric arc furnaces, which are becoming a dominant force in steel production because they are more environmentally friendly and make it easier for steel producers to meet regulatory requirements.
But despite the promise of the business, investors need to be aware that as long as Brookfield is the majority holder, the stock is likely to react negatively every time a liquidity event is announced.