More disclosure surrounding Accelerated Buyback yields higher than expected accretion.
In the back of IGT’s 10Q filed on August 8th, we found additional details surrounding their “Capped Accelerated Stock Buyback Agreement, dated as of June 13, 2012” with Goldman. The mechanics of the agreement allowed IGT to reduce their share count by a minimum 21MM by the end of F3Q, but leave the ultimate number of shares delivered to the company to vary based on IGT’s arithmetic VWAP (volume-weighted average price per share) over the course of the following 3-6 months. In layman’s terms, since the price dropped like a rock post its earnings release on July 10th, we’re pretty sure the ultimate share reduction will be a lot greater than the initial 21MM at the same $400MM price tag.
We calculate the buyback could be 5 cents MORE accretive annually than our original estimate.
On June 13th, IGT entered into accelerated buyback agreement with Goldman Sachs under which they would repurchase $400MM of the $1BN share repurchase program authorized by their Board. The mechanics of the agreement are actually fairly standard so we’re not sure why IGT didn’t explain it better on their earnings call. Below is our understanding of how the accelerated buyback works:
- On June 19th IGT paid GS $400MM and delivered 21MM shares over the course of several days. This allowed IGT to start F4Q with approximately 274MM shares. $320MM of the $400MM paid to GS was classified as treasury stock purchase and the balance was recorded in APIC.
- In July, an additional 1.8MM were delivered and thus far, 4MM share have been delivered in through August 6th. On August 6th, IGT had 267MM shares outstanding.
- The ultimate number of shares that get repurchased will be determined by what IGT’s arithmetic VWAP is through at least September 19th but no later than December 19th. Goldman has the discretion over the exact date to settle the trade within that window. Based the VWAP of where IGT’s traded over the last 37 days and assuming that the stock stays between $11.25 and $12.50, the number of shares delivered should be between 31-33MM.
- Assuming our math is close to accurate, IGT’s share count at September 30th should be around 264MM with a weighted average diluted count of 268MM.
- The agreement has a cap of $19. Normally, companies need to pay for a cap (somewhere in the neighborhood of 3% for a stock with IGT's volatility). However, perhaps due to the deep out of the money nature of the cap, IGT did not have to pay any additional money for this option.
- The accelerated buyback agreement only covers the initial $400MM
- IGT is not restricted on additional buyback activity during the period of the Accelerated Buyback as long as the aggregate purchases stay below 25% of 4 week average trailing volume
As to the question of timing, IGT likely had to sign a MPI agreement prior to the execution of this agreement; which means that the deal had to be done several weeks prior to the quarter or after IGT reported. While this clearly improves EPS, this doesn't translate into higher management bonus incentives, as we previously thought, given that performance-based compensation is solely tied to revenue and operating income. Even if IGT knew or suspected that a miss was in the works, they had to weigh the option of a lower average share count in 4Q vs the ability to buy back a few million more shares. The other issue was that if they announced the buyback after the call, it would have likely buffered the stock decline – so on a net-net basis they may not have gotten a much better price. If their stock trades in the $11.25-$12.00 range for the next 57 days, the effective buyback price will likely be in the $12.13-12.57 range.