Financial analysts are puzzled by Valeo’s plan to return money to shareholders, which seems to clash with the French supplier’s ambition to expand by acquisition.
Valeo intends to buy back E250 million worth of its own shares, or 7.5 percent of capital. At Valeo’s April 21 annual meeting, the French supplier’s board will ask shareholders for permission to proceed.
But the planned buyback comes barely 18 months after Valeo borrowed E463 million in convertible bonds “for general financing needs and acquisitions.”
“We were all a little surprised by the announcement,” said Vincent Courtois at French investment bank Fideuram Wargny in Paris. “The strategy is somewhat obscure.”
Valeo maintains there is no contradiction between the share buyback and its acquisition policy.
Chairman Thierry Morin says he has enough money in this year’s budget for another medium-sized acquisition. Earlier this year, Valeo bought Johnson Controls Engine Electronics Department, a French-based engine electronics specialist, for E330 million.
But analysts say Valeo will have to forego the acquisition of anything larger than JCEED, however attractive such a target may be.
The share buyback, added to the JCEED purchase, will push Valeo’s debt-to-equity ratio to 68 percent, from 27 percent on December 31, 2004. This prospect caused Moody’s, a credit rating agency, to warn it might lower Valeo’s rating in a year to 18 months. Such a move would make it more expensive for Valeo to borrow on capital markets. Morin says Valeo can live with a debt ratio as high as 90 percent as it generates enough cash to easily repay its debts.
Analysts speculate that Valeo is under pressure by one of its major shareholders to boost its share price. Valeo’s offer is unusually generous at E40 a share, 13 percent more than the market price at the time of the buyback announcement, said analyst Gaetan Toulemonde of Deutsche Bank in Paris. Typically companies that buy back shares, such as PSA/Peugeot-Citroen, do that at the market price.
The US press reports that US investment fund Blackstone is interested in Valeo. Blackstone denies it.
Because 73 percent of Valeo equity is held by the public, the supplier is a frequent topic of takeover rumors.