A series of good news from
Legg Mason Inc.
) has led to a significant jump in its stock price in the past two
days. On Wednesday, the company has announced its plan of
repurchasing $1.25 billion in debt held by a fund which is managed
Kohlberg Kravis Roberts & Co. L.P.
Besides reducing its debt, Legg Mason has also declared a $1.0
billion authorization for share buybacks. During the quarter, the
company intends to deploy the residual $155 million in share
buybacks from its prior authorization.
To finance the buyback of $1.25 billion convertible senior notes
held by KKR, Legg Mason will make use of $250 million drawn
on its existing revolving credit facility, other debts
and cash on hand. The move is a strategic fit as it will lead to a
net reduction in outstanding debt. Notably, Legg Mason had issued
convertible senior notes to KKR way back in 2008 to infuse capital
in its business. The 2.5% senior notes were due in 2015.
With this early debt extinguishment, Legg Mason expects to
report a non-cash charge of around $70 to $80 million in the
company's first fiscal quarter. However, it is expected to be
accretive from the second quarter of fiscal 2013.
The terms of this buyback include a repayment at par, a
prepayment fee of $6.25 million to KKR. Moreover, it includes
issuance of new warrants to KKR that provide for the purchase of
approximately 14.2 million shares of common stock at $88 per share.
Moreover, Scott Nuttall, the head of KKR's global capital, will
step down from the Board of Directors at Legg Mason. The company
has issued $650 million of 5.5% senior notes due 2019 to finance
its KKR debt buyback.
We believe these strategic initiatives would help Legg Mason in
strengthening its balance sheet and enhance its capital structure.
Its gross debt will be immediately reduced by $350 million.
Moreover, the period for debt maturities will be lengthened. Such
moves will add flexibility and help Legg Mason in returning wealth
back to its shareholders. Such measures according to our opinion,
will give a fillip to investors' confidence on the stock.
We believe the company has the potential to outperform its peers
in the long run, given its diversified product mix and leverage to
the changing market demography. Although, in the near term, assets
outflows will remain a headwind, yet with the restructuring
initiatives and the cost-cutting measures, we expect operating
efficiencies to improve. Moreover, strategic investments in both
organic as well as opportunistic acquisitions would help boost its
business going forward.
Legg Mason currently retains its Zacks #3 Rank, which translates
to a short-term Hold rating. Considering the fundamentals, we also
maintain a Neutral recommendation on the stock.
KKR & CO LP (KKR): Free Stock Analysis
LEGG MASON INC (LM): Free Stock Analysis Report
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