10/03/2016: Why isn’t Seven Group paying back their SVWPA hybrids with less expensive funds?

Scott Schuberg:

Good afternoon members, and welcome to Rivkin Virtually Live Local for Thursday, the 10th of March. I’m Scott Schuberg, joined by Shannon Rivkin. How are you Shannon?

Shannon Rivkin:

Good, thanks Scott. How are you?

Scott Schuberg:

Very well, thanks buddy. A reminder to everybody that this show contains general advice only, and all of my incessant begging for questions seemed to have paid off. We’ve got plenty of them today, so thank you very much for those. 

Shannon Rivkin:

A lot of good questions as well.

Scott Schuberg:

Okay. All right, we’ll get into the questions.

Shannon Rivkin:

Yeah.

Scott Schuberg:

Rafael from Victoria: A question on the Seven Group Hybrids (SVWPA). Your analysis on the discrepancy between the levels of the SVWPAs and the SVW, which is the underlying stock, and in general your assessment of the merit to own SVWPA all makes sense. However, I struggle to understand why Seven Group does not pay back some of these hybrids using funds that are less expensive. It is almost as though they know something that we don’t know. Please help me clear this mystery.

Shannon Rivkin:

Right, well that is a very insightful question, a very good question, and I guess the only way to know why this has not been the case is to really know this company going back a long way, and the main reason is Kerry Stokes is the main shareholder. It’s been his very clear goal without having said it is to increase his ownership in this without having to pay a big premium, take out all the main shareholders. What he’s been doing is with all of the spare cash that he can, he’s buying back stock, so there’s been an on-market buyback throughout this whole period, even though undoubtedly the company’s gone through some rough times. Some of their investments have obviously not performed in recent years, but that on-market buy back has remained there, so his shareholding is increasing.

I should say as well that they pay out a yield that’s at least on par with the Seven Hybrids. They pay 40%, so 40 cents fully franked. At least before the recent gain, it was on a similar level to what you’re seeing on hybrids right now, so by reducing the amount of shares on issue there, it would have this similar effect on what the buyback on Seven Hybrids would be. He also increases his exposure to his overall holding of Seven, so it’s clear to me that that’s his goal in the short term. Absolutely there is a chance that he comes out and does the same with the hybrids, but my view that’s likely in the short term. Yeah, the long-term goal is for him to own more and more of this company and reducing shares on issue just reduces the dividend cost as well, so it’s not all bad that he does that.

 

Scott Schuberg:

Do you there’s likely a gap in, like a arbitrage for him if you would try and redeem these and restructure the debt. Is it …

 

Shannon Rivkin:

You’ve got to remember, he’s paying interest on face value. Yes, if he can come out and buy all of them at eighty dollars, sure, but I don’t people will sell if he comes out and says I’m offering you at eighty dollars because A, that’s an 8 or 9% yield, and B, his intention is kind of given away then, and why would they. Yeah, absolutely. I think that if he was confident that he could buy back really cheaply and all of them, sure.

 

Scott Schuberg:

Do you know what his holdings are in the hybrid?

 

Shannon Rivkin:

No I don’t. They don’t release shareholder balances on that.

 

Scott Schuberg:

All right. Yeah, still a little mysterious, but I hope that clears up things slightly for you, Rafael.

 

Shannon Rivkin:

Ultimately, Rafael, as you said, the fact that Seven is now performing well and its assets performing well, that just means it’s more likely to have the cash flows to continue paying the interest, and if you’re able to hold those with what I think are very low likelihood that interest is not going to be paid at 11 or 12% is a crazy good opportunity.