CCH buys back its own shares

April 27, Coca-Cola Hellenic’s extraordinary shareholder meeting decided to approve a share buy back of up to 5% of the company’s shares (see CCH press release). At a range of share prices between 1 and 20 Euros, this will potentially lead to spending on the purchase of its own shares between 18,3 mln and 380 mln Euros. At current shareprices of about 11.66 Euros, the cost of fully realizing the program would be about 213 mln Euros extra expense for a company that has announced decline in profit and explains to its workers in all countries where it operates that the crisis led to the need of strict financial discipline. What does this move mean?
Taking an impartial definition (here from wikipedia), “A share repurchase distributes cash to existing shareholders in exchange for a fraction of the firm's outstanding equity”. That is, shareholder receive cash, and the number of shares in the market is accordingly reduced. Why would a company do that?
Again wikipedia: “Companies making profits typically have two uses for those profits. Firstly, some part of profits are usually repaid to shareholders in the form of dividends. The remainder, termed retained earnings, are kept inside the company and used for investing in the future of the company. If companies can reinvest most of their retained earnings profitably, then they may do so. However, sometimes companies may find that some or all of their retained earnings cannot be reinvested to produce acceptable returns.” (emphasis added)
In the current times of crisis and falling consumer demand, obviously, CCH has decided that reinvesting the enormous profits the company still yielded in 2008, 425 mln. Euro, is not appropriate. While the CEO of The Coca-Cola Company, Muhtar Kent, constantly pledges keeping up levels of investment, one of the biggest bottlers in a key emerging market territory rather spends the money on distributing cash to shareholders. The company thus chose the easier way to keeping up levels of what is called “earnings per share” – the profit per existing share the company receives in a particular period. If you have less shares outstanding (because you bought some of them back and cancelled or stored them), the profit is shared between a lesser number of remaining shares. Business does not need to grow to keep investors happy…
Wikipedia quotes yet “another reason why executives, in particular, may prefer share buybacks is that Executive compensation is often tied to executives' ability to meet earnings per share targets”. That means if earnings per share a kept high through a share repurchase, managers keep their high income, even if business develops negatively. However employees feel only the negative business development, they don’t gain anything from the earnings per share! We do not know about the incentive schemes for CCH executives. We can only hope that this is not a cheap move to retain personal earnings.
However we can be sure about one thing – a company that has enough money to spend approximately 200 mln Euros on buying its own shares is not as broke as management sometimes wants employee representatives to believe. The company calls on its employees to tighten the belts in times of crisis, arguing that we are all sitting in the same boat. But at the same time that it throws hundreds of people overboard cutting jobs, it does everything to make its shareholders staying well-fed and keep them happy partying on the deck…

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