NEW YORK — The reactions were mixed from Wall Street analysts on news that Limited Brands Inc. was commencing a $2 billion stock buyback program through a Dutch auction, followed by a post-purchase, special dividend of $500 million.
A Dutch auction involves a seller soliciting bids on a large holding of bonds or shares within a specific price range. After looking at the bid prices received, the seller usually takes one that is low enough to sell the entire block. The modified Dutch auction tender offer lets shareholders sell back shares of common stock for no less than $21.75 each and for no more than $25 each. The auction began Thursday and ends at midnight on Nov. 4. Limited said it will choose a per-share price that won’t exceed $25, but that will let it buy back $2 billion worth of stock. All tendered shares will be repurchased at that price.
Assuming $2 billion worth of stock is bought back, the company will then institute the $500 million special dividend. Stockholders who take part in the buyback will not be allowed to receive the special dividend. The company will fund both the share buyback and special dividend with a combination of existing cash balances and new borrowings of $1 billion.
Merrill Lynch analyst Mark Friedman wrote in a research note on Thursday, “We believe this action speaks directly to the company’s confidence in its current business and cash position and expected future cash flow.”
Mark Montagna, analyst at Wells Fargo, wrote in his note that he expects the auction to be completed at $21.75. In the first quarter, Limited completed a Dutch auction at $19.75, which represented the bottom of its offering range.
“Even with the $500 million special dividend, we do not feel this will add enough incentive to hold the shares. We do not view a special dividend as boosting the long-term value of a company. In our view, a one-time dividend benefit comes far short of outweighing the negative impact of a weakened balance sheet. Management even stated that its debt rating is likely to reduce one notch, but still remain investment-grade,” Montagna wrote.
The analyst added that investors might look to Limited’s disappointing apparel comps and expect it to continue into the fourth quarter, or even into next year’s first half.
On Thursday, the specialty retailer posted a same-store sales decline of 5 percent, with the miss in apparel comps attributable to a shift in the retailer’s annual fall sale from September to October.
Standard & Poor’s Ratings Services on Thursday lowered its long-term corporate credit rating of Limited to “BBB” from “BBB+,” but affirmed the “A-2” short-term rating on the company. S&P said that the outlook was stable.
“The downgrade reflects the expected decline of credit protection measures due to the partly debt-financed shareholder-return initiatives, as well as a somewhat more aggressive financial policy,” said S&P credit analyst Ana Lai.
— Vicki M. Young and Meredith Derby