Leveraged Stock Buyback–Just Another Way for Insiders to Sell?

March 9, 2006

AutoNation, Inc.(AN), America’s largest automobile retailer, has filed to sell $900 million of senior secured notes, along with about $450 million of bank financing and cash, to carry out a stock repurchase and bond redemption plan.

AutoNation said the stock repurchase of approximately 50 million shares, represents about 19% of its outstanding shares. Existing owners are being offered $23 a share on a pro-rated basis for their stock, a 5.2% premium to AutoNation’s closing price of $21.86 on Thursday.

Activists for leveraged stock buybacks like to champion repurchases–echoing hackneyed sentiments like, "this must be a sign that the company’s management is optimistic about the future and believes that the current share price is underervalued."

"The tender offer for our common stock demonstrates our confidence in the future of AutoNation," said management, "The transaction will allow us to deliver stockholder value while retaining financial flexibility to take advantage of future opportunities."

Management expects that the buyback(s) will add 8 cents to 10 cents a share to the Company’s annual earnings.

Mr. Edward S. Lampert, a member of AutoZone’s Board of Directors, added that the transaction will "create a more efficient capital structure." [ed note. kid you not!]

The capital structure will change. When AutoNation replaces this equity with debt, the balance-sheet will have an approximate net debt-to-capital ratio of 30%, compared to about 5% before the deal. Contrary to management’s comments, shareholders get the buyback’s benefits at the expense of owning a more leveraged business.

But while investors seem delighted on the news, Fitch Ratings downgraded AutoNation’s debt to junk status, from BBB- to BB+, citing the increased debt-serving and the dismal state of domestic automakers and the impact further weakness could have on the company.

Perchance the Company’s PR efforts behind this leveraged stock buyback is nothing more than spin–an attempt by insiders to divert attention from the negative undertone associated with traditional insider selling?

Oh, Ed Lampert, who owns 77 million shares of AutoNation, or roughly 29% of the Company, said that he, too, will tender all of his stock into the buyback offer.

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