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Sri Lanka share buyback from DIMO
30 Jun, 2008 10:58:46
June 30, 2008 (LBO) – Sri Lanka's Diesel & Motor Engineering (DIMO) said it was spending 544 million rupees to buyout a stake held by Hayleys Limited using provisions in the island's new company law that permits share buy-backs.
Under a share buy-back a company uses its assets to buyout shareholders in a transaction that reduces net assets of the company but can increase earnings per share and price of remaining shares if the company can maintain profitability.

When a company is not cash-rich such a move could also increase its debts and depress future earnings.

In other markets share buybacks are usually offered to all shareholders as a way of giving liquidity without diluting their stakes in the investee firm.

But a buy-back of a specific shareholder and cancellation of such shares can increase the relative holdings of other shareholders.

Such a transaction, especially if financed with debt, will have features of a leveraged buyout or management buyout.

DIMO said in a stock exchange filing that the board of directors had made the decision following a request from shareholders at its annual general meeting on June 20.

Key shareholder Hayleys were originally due to sell its 3,397,611 shares at 160 rupees to a group of DIMO shareholders made up of the Pandithage, Algama and Peiris families.

The DIMO said A R Pandithage had consented to nominate DIMO to purchase the shares under an agreement entered into with Hayleys and himself.
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4. Jul 03
Companies can add value to its shares by buying some of them back as long as they do it for the right reasons.If so they should be at least mindful of the following.

A)Availability of surplus funds in the company B)Buying below its intrinsic value?

The above are some basic principles any company will try to adopt for the benefit of the share holders.

3. Jul 02
Is this share buyback really in the best interest of DIMO's minority investors?
After adjusting for the funding cost of the Rs544 mn that DIMO has spent on buying its own shares from a targeted specific investor at a premium price of Rs160, the EPS of DIMO appears to be lower than that before the share buyback (other things being equal), even after allowing for the reduction in the number of shares.

Investors meanwhile seem to have voted with their feet and given a resounding thumbs down to the deal, with DIMO closing at Rs101 today, well below the share buy back price of Rs160 just two days ago.

2. Jun 30
A share buyback that only buys the shares of a particular investor is not common, especially when the price paid is at a premium.

Best practice would arguably have been for the company to make an announcement that it is willing to buy back a certain percentage of its shares, with all shareholders of the company being entitled to give up that percentage of their respective shareholdings.

Alternately, the company could have announced a tender offer, with all shareholders submitting prices at which they would be prepared to accept the bid for their shares. The company's outlay per share would usually be less in this instance.

In both these options, all shareholders would be treated fairly, without any discrimination.

1. Jun 30
Share buybacks are usually effected when the share price of the company is relatively low and when the company buying its own shares has surplus cash and lacks suitable investment opportunities.

Neither of these conditions are satisfied in this instance.

The proposed share price is well above the 12-month high and DIMO had net debt of over -Rs2.7 bn as at 31 March 2008.