Carl Karcher Enterprises' stock jumped $3 per share Thursday in active trading after the company announced plans to buy back up to 2,950,000 shares--or 25.1% of those outstanding--in a deal valued at up to $70 million.
The move amounts to Karcher--operator of 383 Carl's Jr. restaurants--investing in itself to dispose of its excess cash. Analysts say it will allow the company to raise the price of its undervalued stock while increasing earnings per share.
In a so-called "Dutch auction," the Anaheim-based fast-food company is conducting a cash self-tender offer for up to 2 million shares at a premium price not more than than $24 per share and not less than $21 net per share. The stock has been trading at about $19 per share.
In a separate agreement, the company also has agreed to buy up to 950,000 shares from a trust set up to benefit Carl N. Karcher, the 71-year-old chairman and chief executive, and his wife. After completion of the offer, the Karcher Trust will sell its stock at the same purchase price paid to the other shareholders.
Problem: Too Much Cash
Both transactions will reduce the company's 11,729,669 outstanding shares by about 25%. Therefore, Carl Karcher's interest will remain at about 42% of the outstanding shares.
The buyback should solve Karcher Enterprises' problem of too much cash. "If you hold too much cash, it can dilute return on equity," said Paul Salazar, a securities analyst with Crowell, Weedon & Co.
For the past several years, the company's balance sheets have reflected net cash of $50 million to $60 million.
"They have a lot of cash, a strong balance sheet and a cash flow in excess of their capital needs," said Thomas Caraisco, research director at Henry F. Swift & Co. "Management put its money where its mouth is and decided to buy back (stock) at a price more realistic than where it is selling."
Executives with Karcher Enterprises have said for months that the company's stock was undervalued--particularly after fiscal 1988 earnings early this year reflected a sharp turnaround, with record earnings of $16 million.
Loren Pannier, Karcher's group vice president for finance and administration, said management decided to make the self-tender offer after considering ways to dispose of its surplus cash. The choices included paying a one-time cash dividend, building more Carl's Jr. units, or buying another company, he said.
Instead, "we're shrinking the shares outstanding and squeezing up the earnings-per-share growth," Pannier said. "It's designed to improve (that growth), our return on equity and return on assets."
Several Wall Street analysts said they expect the company's offer to hike the value of the company's stock and to increase earnings over the next 12 months.
"I think it will add at least a nickel to this year's earnings (per share) and 10 to 15 cents next year," said James Murren, restaurant analyst with C.J. Lawrence, Morgan Grenfell. With higher earnings, he added, "I think (shares) will start moving up to the $25 level in about six months."
Already on Thursday, Karcher Enterprises closed at $22.125--equaling the 52-week high--and was one of the most actively traded stocks on the over-the-counter market with 756,000 shares changing hands.
That is because under the Dutch auction procedure, the company's shareholders can offer to sell their stock within the stated range of $24 to $21. The company will select the lowest purchase price within that range that will allow it to buy back up to 2 million shares.
The actual price paid will be based on the average price offered within the stated range. To prevent price gouging, the company will not buy out those shareholders who offer to sell for more than that average price.
Fifty percent of the funds to buy the shares are to come from the company's available cash, cash equivalents and marketable securities. The other half of the funding is to come from bank financing.
That, in turn, will lead to some costs. "There's going to be a loss of investment income. And there will be additional interest expense," said analyst Salazar. "But that will be offset by the reduction in (the number of outstanding) shares"
The offer expires at midnight, New York City time, on Aug. 4 unless it is extended.