Shares of Mirant Corporation ( MIR) rallied Tuesday after the company announced a share buyback program of up to $1.25 billion and the auction of international assets. The board of directors agreed to repurchase shares through a Dutch Auction tender offer of up to 43 million shares at a price between $25.75 and $29 per share. Mirant shares were recently up 41 cents, or 1.5% to $27.21. The auction will begin Wednesday and will be funded in cash via a combination of cash on hand and cash obtained through completion of a term loan. "Our strategic plan reflects our continued commitment to enhance shareholder value, both through the return of cash to our shareholders and through our continuing U.S. business," Mirant Chairman and CEO Edward Muller said in a press release. These developments are the result of efforts by well-known activist hedge fund Pirate Capital, whose founder Thomas Hudson pushed for changes last month, as reported
here. Pirate owns 1.6% of Mirant shares and called for a $4.7 billion buyback, in a letter sent to the company and included in a 13D filing on June 20. The amount authorized by the company Tuesday is substantially less than Pirate's recommendation, but nothing indicates that it is final. In addition, Pirate called for the sale of the Philippines and Caribbean assets, which the company agreed to do Tuesday. Mirant retained Credit Suisse First Boston as its advisor for the sale of the Philippines business while it hired J.P. Morgan for the sale of the Caribbean business. The company declined to comment, through a spokesman. Hudson did not return a call. In a financial plan attached to the letter sent to the company last month, Pirate set three goals for the board of directors: closing the valuation gap, divesting assets and buying back stock. The company has at least begun to implement two of those goals: the share buyback and the sale of assets.Concerning the valuation gap, Pirate estimates that the company's value is approximately $32 a share, assuming a peer valuation of 7.7 times 2007 EBITDA. Since the activist letter on June 20, shares have gained 7%.
Pirate also marked an important victory last month when it convinced Mirant to withdraw its $8 billion unsolicited bid for NRG Energy Inc. ( NRG). Since the company withdrew its bid, shares have increased by 11.4%. Pirate estimated in its plan that the company could extract cash in both the near and mid terms. On the near-term basis, Pirate said the company could generate $1.3 billion from its balance sheet as well as $500 million from a "conservative levered recap" and $940 million from the Philippines recap. For the mid term, the hedge fund calculated that Mirant could obtain $1.2 billion of proceeds from the sale of the remaining Philippines equity and $775 million from the sale of the Caribbean assets. Pirate's idea was that the company had sufficient sources of cash to be able to maximize stockholder value. Yet the stock is not trading anywhere near $32. If the company fails to achieve that goal, Pirate said that it will push for a sale of the company. In other words, Mirant's board is not off the hook yet.