Is the CIMIC buyback a takeover in disguise?

CIMIC Group has just announced an on-market share buyback. But its main purpose is to lift the stake of Hochtief, CIMIC’s major shareholder.

Yesterday CIMIC Group (ASX: CIM) – the company formerly known as Leighton Holdings – announced a share buyback. The company has authorised broker Merrill Lynch to buy back up to 10% of its shares on-market over the next 12 months.

The rationale, according to the ASX announcement, is that the buyback ‘signals the Company’s belief that the current share price is attractive’.

Not mentioned – but perhaps more important – is that Hochtief’s current 70% shareholding in CIMIC will rise to 77% if the 10% buyback is completed. In fact, let’s call the buyback for what it is: a takeover by stealth.

Management control

There’s nothing untoward here. Hochtief, in turn controlled by the Spanish company ACS, is perfectly entitled to exercise management control over CIMIC. Control entitles Hochtief to conduct share buybacks.

It also entitles Hochtief to sell CIMIC’s assets. Over the past year, CIMIC has sold John Holland as well as its services business into a joint venture with Apollo Global Management LLC (NYSE: APO). The two transactions raised cash proceeds of almost $1.6bn.

The cash will – rather handily – help finance the share buyback. Indeed, the strategies Hochtief is implementing have the whiff of private equity about them.

The difference is that private equity firms sell assets to raise cash, then use that cash to pay themselves distributions as the business’s 100% owner. With minority shareholders to consider, Hochtief must play a longer game. Before today, some market commentators had been suggesting CIMIC could pay a special dividend, but this shows ignorance of Hochtief’s strategic ambitions.

Differing interests

Does all this matter? Well, not necessarily, as long as you’re aware of what’s going on. Major shareholders can and often do have very different interests from those of minority shareholders.

This isn’t the first time that controlling shareholders have lifted their stakes in listed companies through buybacks. ACS recently lifted its holding in Hochtief to 67% using the exact same method. In Australia Kerry Stokes implemented a series of transactions and buybacks that saw his shareholding in Seven Network Ltd rise from 20% in 1995 to 48% in 2010.

Presumably the end game for ACS/Hochtief is 100% ownership of CIMIC, long considered the jewel in the crown of this multi-national tri-company construction empire. With the help of a share buyback or two, as well as the creep provisions of the takeovers code, they’re probably not far away.

As CIMIC’s stock liquidity dwindles, so will broking analyst interest. The company will then be ripe for ACS and Hochtief to mop up the minorities with a final takeover bid.

The strategic game ACS and Hochtief are playing has only one conclusion. It’s this: whatever you as a minority shareholder want, you probably won’t own any CIMIC shares in five years.

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