Want to see your company's share price jump 10% overnight? All you have to do is announce a tender offer to buy back shares, with a price range that peaks about 10% above the current price.
That's what happened to shares of Sonic (NASDAQ:SONC), purveyor of drive-in burgers, on Monday, the day after it announced its offer. It plans to buy about 25.45 million shares at a price between $19.50 and $22, up to $560 million worth, after the offer closes on Sept. 22. This represents a 29.6% decrease in its basic share count. The company will finance the buyback through a senior line of credit.
In many share-buyback programs, a company asks its board for authorization to repurchase a certain dollar value of shares. However, it does not always purchase the full amount, and shareholders do not realize the full benefit. On the other hand, when a company announces that it will proceed with a tender offer, the buyback is practically assured, and shareholders will benefit.
The tender offer will be a "modified Dutch auction" offer, in which shareholders tender some or all of their shares to the company at a price within the range specified. Once the offer period expires, the company will determine the lowest price offered that will enable it to buy its target of 25.45 million shares. All shareholders offering that price or lower will receive that price in exchange for their shares. If the company ends up spending less than $560 million, it has the option to purchase up to an additional 2% of the outstanding shares to meet the $560 million target.
While details differ, several other companies have pursued similar plans recently. Microsoft (NASDAQ:MSFT) will complete a Dutch auction tender offer on Thursday and expects to buy up to 8.1%, or 808 million, of its outstanding shares. Earlier this year, both newspaper company Tribune (NYSE:TRB) and radio-station operator Cumulus Media (NASDAQ:CMLS) participated in Dutch auction tender offers to repurchase 15% and 19%, respectively, of their outstanding shares.
Ideally, a company pursues this route to return value to its remaining shareholders. That appears to be happening here. With $1.01 in trailing-12-month basic earnings per share and a closing price last Friday of $19.73, the stock has a P/E of 19.5. Assuming that all 25.45 million shares will be repurchased, and that the market gives the company the same multiple going forward, the remaining shares would be priced at about $28, well above the maximum of the acceptable tender range.
However, investors should note that there is some dilution hanging over the company. At the end of the fiscal third quarter on May 31, the company reported about 7.4 million options outstanding, and about 6.1 million shares left to be given to employees and non-employee directors from its 2006 incentive plan. This potential dilution represents slightly more than half of what the company will repurchase, which will lower the value of that repurchase to shareholders.
However, on the whole, this appears to be a positive move for shareholders. And, if the company can continue to perform as it has, then remaining shareholders may expect to see even better returns in the future.
For more related Foolishness about Sonic:
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Fool contributor Jim Mueller has not gone Dutch in years and owns shares only in Microsoft of the companies mentioned. The Fool is investors writing for investors.
