Suzuki Motor's capital structure is due a tune-up. The Japanese carmaker has amassed a huge cash pile during a long feud with 19.9 per cent owner Volkswagen. Now arbitrators in London have told the German group to sell, and Suzuki wants to buy the $3.8 billion stake back. That would mean a big boost to earnings - and hearten Suzuki's hedge-fund fan club.
Uncertainties remain: it is not clear exactly what the stake will cost, nor if another buyer could potentially step in, since VW does not explicitly say it will sell to Suzuki. Moreover, the ruling also suggests VW could seek damages for breach of contract. Still, this failed 2009 partnership has been a major distraction almost since it was agreed, and the prospect of a resolution is good news for Suzuki investors.
Retiring almost a fifth of Suzuki's shares should boost earnings per shares by nearly 25 per cent, less whatever derisory interest the company currently earns on that cash. It would also be a neat way to streamline a balance sheet puffed up with roughly 1 trillion yen ($8.3 billion) of cash.
All this will be welcomed by Suzuki's admirers at Balyasny and Third Point. The US hedge funds reckon Suzuki is undervalued, thanks in part to the commanding position which listed unit Maruti Suzuki enjoys in India's booming market. A decade ago the subsidiary, of which Suzuki owns 56 per cent, was worth barely a third as much as its parent; today both have equal market value.
Well, maybe. Many sell-side analysts think Indian growth is already reflected in Suzuki's share price, and offset by less impressive bits of the empire, like money-losing motorcycles. Besides, if activists are hoping to browbeat Suzuki into changing course, the VW episode shows it is no pushover.
Uncertainties remain: it is not clear exactly what the stake will cost, nor if another buyer could potentially step in, since VW does not explicitly say it will sell to Suzuki. Moreover, the ruling also suggests VW could seek damages for breach of contract. Still, this failed 2009 partnership has been a major distraction almost since it was agreed, and the prospect of a resolution is good news for Suzuki investors.
Retiring almost a fifth of Suzuki's shares should boost earnings per shares by nearly 25 per cent, less whatever derisory interest the company currently earns on that cash. It would also be a neat way to streamline a balance sheet puffed up with roughly 1 trillion yen ($8.3 billion) of cash.
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Helped by what remains of that cash, the company could also lift shareholder rewards. Parsimony makes sense when you are trying to turf someone off your shareholder register. But a payout ratio of 15 per cent looks miserly set against, say, Honda, which aims to return 30 per cent of earnings to shareholders through dividends and buybacks. Cynics might say Suzuki will have more incentive to turn in a better financial performance, full stop.
All this will be welcomed by Suzuki's admirers at Balyasny and Third Point. The US hedge funds reckon Suzuki is undervalued, thanks in part to the commanding position which listed unit Maruti Suzuki enjoys in India's booming market. A decade ago the subsidiary, of which Suzuki owns 56 per cent, was worth barely a third as much as its parent; today both have equal market value.
Well, maybe. Many sell-side analysts think Indian growth is already reflected in Suzuki's share price, and offset by less impressive bits of the empire, like money-losing motorcycles. Besides, if activists are hoping to browbeat Suzuki into changing course, the VW episode shows it is no pushover.