High-Octane Buyback Lifts Spirits at AutoNation

Ed Lampert's love of share buybacks has the engine humming at AutoNation(AN Quote - Cramer on AN - Stock Picks), the car dealership of which he is the largest owner. But some observers wonder if the fuel will prove too rich.

AutoNation disclosed plans Tuesday to borrow more than $1 billion to buy back about one-fifth of its publicly traded stock, an announcement that lit a fire under the recently moribund shares. Lampert, best known for masterminding the takeover of Sears(SHLD Quote - Cramer on SHLD - Stock Picks) by Kmart, said he will sell some of his 77 million AutoNation shares in the deal.

And no wonder: The deal is a good one for shareholders. Under the offer, AutoNation will buy up to 50 million shares for $23 apiece, a 10% premium to Monday's closing price. At the same time, the company will refinance $323.5 million of its 9% senior notes due in 2008 and replace that debt with about $1.35 billion of a bank and bond facility.

The transaction gave shareholders the boost they were looking for. Since the beginning of the year, shares of AutoNation were down about 5%. After Tuesday's announcement, the stock lifted $1.37, or 6.6%, to $22.26 in trading.

But the leveraged share-buyback deal is enough to make some investment bankers wary. The company, though holding little debt now, will increase its net leverage to about $1.5 billion. The deal prompted Fitch to cut AutoNation's debt rating to BB+, or junk status, on Tuesday.

While nobody can say with certainty whose idea the buyback was, Lampert, as the company's biggest holder, must have had a role in the decision. Lampert and his cohorts have two seats on the board, and significant lobbying power when it comes to capital redeployment decisions. His 29% ownership stake certainly helps.

Thursday the company filed a document with the SEC that included a response letter from ESL, Lampert's firm. "ESL agrees to tender all of the shares (without a minimum purchase condition) into the equity tender offer," the note said. Because the company will have to pro-rate its repurchases, Lampert said he expects his percentage stake to remain unchanged.