Bayer CropScience has decided to return surplus cash to shareholders through a buyback offer. The company, which makes crop chemicals, had sold its land at Thane (near Mumbai city) for a sum of Rs 1,250 crore. It had got Rs 520 crore as initial payment and had the final amount of Rs 730 crore was received in November 2012. During 2012-13, it reported a profit of Rs 1108 crore from the sale of its Thane land and Rs 82 crore from the sale of its Powai building.
These property transactions have left it with a large cash pile. Its balance-sheet as of March 2013 showed a sum of Rs 970 crore in cash and bank balances, compared to Rs 430 crore as of the end of the previous year. Most of the increase is attributable to the proceeds from the sale of land, net of tax payments. Even the previous year’s cash balance had a sum of Rs 260 crore as the first instalment received for this land sale.
Its working capital requirement has increased during 2012-13, which has been funded by internal cash resources. Its net working capital (receivables plus inventory less payables) has risen by Rs 130 crore. In 2012-13, its fixed asset base has risen by Rs 88 crore. Thus, Bayer CropScience has cash that is far in excess of its requirements, which can depress a company’s asset utilisation ratios, since surplus cash typically cannot earn the same returns as capital that is employed in the business. Now, the company could have paid a special dividend to return this money, but that would attract dividend distribution tax.
A share buyback, on the other hand, can be done through the market route and the same tax rules that apply to a normal share sale on the exchange will apply. Current regulations on buyback stipulate that a company can buy back up to 25% of its paid-up capital and the amount should not exceed 25% of its net worth. In Bayer’s case, that amounts to 98.75 lakh shares and 25% of its net worth amounts to Rs 483 crore. But at Bayer’s current market price of Rs 1657 a share, a buyback cap of Rs 483 crore will mean it can buy back only 29.1 lakh shares or 7.4% of its equity capital.
But there is another variable to be considered. Bayer’s promoter holding is already at 71.11% and it can go up to a maximum of 75%, as per current minimum public shareholder norms. That means that Bayer can buy back only a maximum of 3.89% of its equity from minority shareholders. If we assume it pays a premium of about 10% to its current price, it will be able to buy back 15.4 lakh shares at a price of Rs 280 crore. That will make a dent in its cash balance but it will still have a sizeable cash balance left after the buyback is completed. Unless Bayer needs this cash for its future expansion plans, it is likely to keep a healthy dividend rate. Another possibility is of acquisitions in the domestic market. Either way, this buyback is only the first step in the utilisation of its sizeable cash balance.
Note: On July 22, Bayer CropScience’s board announced that it has approved the buyback and will be done through the tender route and not the market buyback route. More details can be found in this article here.