OK, we all saw last week that Eddie Lampert sold 4% of his holdings in auto parts retailer AutoZone (AZO). He must not be bullish anymore? Not quite. Let’s look.
Remember this agreement from last year?
AutoZone also announced that it has entered into an agreement with ESL Investments, Inc. (with its affiliates, “ESL”) setting forth certain understandings and agreements concerning ESL’s continued investment in AutoZone. ESL currently owns approximately 36.2% of the outstanding AutoZone common stock. Pursuant to the agreement with ESL, the Company has agreed to use its commercially reasonable efforts to achieve at least the new 2.5x adjusted debt / EBITDAR leverage metric by the end of the Company’s second quarter fiscal 2009.
“We are very pleased to have reached this agreement with our long-term and significant stockholder, ESL, which was motivated, by our desire to continue to return excess capital to stockholders in the context of appropriate, mutually agreed governance arrangements,” said Bill Rhodes AutoZone’s Chairman, President and Chief Executive Officer. “We appreciate ESL’s belief in the Company and its management over the past eleven years and look forward to its continued involvement in helping us achieve our goals for the benefit of all stockholders.”
The agreement with ESL provides, among other things, that, should ESL’s percentage ownership of Company shares increase above certain thresholds, ESL will vote its shares owned above such thresholds in the same proportion as shares unaffiliated with ESL are actually voted. The initial threshold is 40%, which will reduce to 37.5% following the 2009 annual meeting of stockholders. The agreement also states the Company’s intention to add three directors in the near future, two of whom will be identified by ESL for consideration by the Company’s Nominating and Corporate Governance Committee, thereby increasing the Board’s size to 12 members. Thereafter, the Company expects to reduce the Board’s size to 10 members in conjunction with the 2008 annual meeting in December. The agreement also contains certain other protections for non-ESL affiliated shareholders as well as for ESL.
The agreement with ESL or certain of its provisions will terminate, except as the parties otherwise mutually agree, upon the earlier of the date upon which the shares (a) owned by ESL constitute less than 25% of the then outstanding shares or (b) owned by ESL constitute more than 50% of the then outstanding shares, provided that ESL has acquired subsequent to the date of the agreement additional shares representing above 10% of the then outstanding shares.
Then his news from last week?
AutoZone Inc (AZO.N), the leading U.S. auto parts retailer, said on Wednesday its board had authorized another $500 million to buy back common stock.
Shares in the Memphis-based company have gained almost 12 percent since the start of the year as the U.S. recession has prompted more consumers to drive cars longer and shop for better deals on replacement parts.
“AutoZone’s strong financial health has allowed us to continue to repurchase our stock while operating within our targeted leverage metric,” said AutoZone Chief Financial Officer Bill Giles said in a statement.
In late May, AutoZone posted a 9-percent gain in profit that topped analyst estimates.
Billionaire investor Edward Lampert and his ESL Investments owns about 43 percent of AutoZone (prior to recent sale). Lampert is also the largest shareholder in AutoNation (AN), the largest U.S. auto dealership chain.
So, Autozone is upping its leverage ratio and using it to repurchase shares. Lampert’s recent sale lower his ownership to below the 37.5% threshold so he may vote his shares as he wishes and maintains board representation.
What happens now? As Autozone completes their repurchase (approx $600m left) they will have reduced the outstanding shares (at today’s prices) by 7.5%. That sale also triggered a 6% drop in the stock price so that $600, will repurchase moire shares. In essence, Lamper sold shares for a nice profit and then Autozone will repurchase shares to increase his ownership once again back to the mid 40% range.
Why not hold them to get to the 50% threshold? The agreement above requires Lampert “to acquire” additional shares to the gain benefits from being at/above 50% in terms of voting. One can only assume he sees no “value” in shares at these prices (they aren’t) and therefore does not want to buy more. Doing it this way he can free up capital and have the company maintain his ownership level for him.
Nice….
On another note, Autozone, in my opinion is nearing an earnings peak. With auto sales at decade lows they have benefited from the repair biz. If “cash for clunkers” does increase sales as predicted by AutoNation CEO Mike Jackson, that will directly negatively impact Autozone’s biz. Perhaps another reason Lampert is not buying more???
Disclosure (“none” means no position):Long AN, none