LDK Solar Buyback: More Than a Gesture?
NEW YORK (TheStreet) -- LDK Solar (LDK) announced a $110 million share buyback plan on Monday, sending the stock up 7% and making the company one of the only solar names to start the week with positive momentum.
The Chinese solar company said the move was made in response to its shares being "grossly undervalued" but it turns out there are a few important caveats for solar investors to think about.
An authorization to buy back shares does not mean a company will, in fact, follow through with the repurchases. Solar investors will have to watch the average share count of LDK quarter over quarter to monitor if LDK has, in fact, bought back any shares.
LDK Chairman Xiaofeng Peng has pledged 31% of the LDK shares that he owns as collateral to banks for LDK loans. With the recent decline in LDK shares, the freefall in wafer pricing and weak industry demand keeping LDK shares at risk, there is a chance that the buyback is intended to protect the chairman in the event of a margin call by the banks.
This case was laid out in a research note from Wells Fargo analyst Sam Dubinsky. "While seeking to enhance shareholder value, there could also be deeper motives as the program may help de-risk the investment of the Chairman/CEO, who has pledged a high percent of his shares as collateral for LDK loans...If LDK shares continue to fall in value, there could be a margin call and Mr. Peng may be obligated to pledge additional shares or offer other collateral for loans; failure to meet a margin call could result in change of control of the company," Dubinsky wrote. Edwin Mok, Needham & Co. analyst, said the shares pledged by the LDK chairman as bank collateral are a legitimate issue for investors to consider, though the stock would need to fall more before it became an immediate risk. Down more than 30% so far in 2011, LDK shares have been sitting the $7 range this late May. Mok said the buyback plan is a positive statement in support of the stock, even if it is replete with caveats.Select the service that is right for you!
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