Some times you have to wonder about the thinking of company boards, and the way many in the media just lay down on the job and don’t get upset or astonished any more at some of the corporate greed and self-enriching going on.

We’ve seen a couple of good examples this week: Monday saw BlueScope Steel close two steel plants, sack 1000 people and pay management bonuses totalling $3 million, for the 2010-11.

And, apart from Senator Nick Xenaphon and a couple of tabloids (briefly), the rest of the media blithely accepted that news.

But what about Pacific Brands? The Bonds, Berlei and bed linen company yesterday announced a share buyback and 120 office staff, mostly in Sydney, would lose their jobs.

Pacific Brands has already cut more than 2500 jobs (most of them women) in the past couple of years. While some of the office workers will be offered jobs in Melbourne (great if you have a family and a life in Sydney), most will go. Just another fact of corporate life, I hear you mutter.

But the job losses were a sort of after thought on the same day as release of the 2011 profit, a final dividend, a profit warning for the coming year, and a buyback of up to 10% of the company’s shares.

The buyback was the key announcement; news of that had the desired result, the shares jumped 14%. And no one had a second thought for the 120 people who are losing their jobs.

The buyback is for 10% of the issued shares in Pac Brands, or about 93 million. Not all might be bought back, the company says it will have “regard to the prevailing share price and market conditions”. In other words, the company will buy more shares when the share price falls or remains low. It is a share price support mechanism for the next 12 months. It will shut up big shareholders who might complain about the management of the company, and smaller shareholders who turn up at annual meetings with a moan or three.

The buyback will be done at market price, and the announcing of it yesterday potentially boosted the shares by 14% and the cost by 14%, as it was intended. Shareholders will benefit and no doubt there will be something nice and tax friendly in the buyback, so shareholders will get an added benefit from taxpayers (including all those people sacked and being sacked by the company).

Big institutional shareholders will love that: they get a price for their shares, with a tax advantage, then if they like the company, they buy back in, further boosting their remaining holdings and making themselves look clever. It is a financial pea and thimble trick.

The mechanics of a share buyback are usually like this: the company doing the buyback specifies the size of the buyback and quite often, if not always borrows the money from a bank and uses that to pay for the shares, and pays the amount of the loan back out of cash reserves or cashflow. The Pac Brands buyback could cost as much as $70 million if the share price averages just over 70 cents over the next year and the full 10% of issued shares are bought in.

It had $155.4 million in cash and other securities at June 30. The interest paid to the bank on the loan is a tax deduction, so the buyback is what the analysts call “tax efficient”. At 9%-10% interest on a corporate overdraft the cost of using a bank “facility” to finance the buyback over a year could be $5 million-$7 million, which is roughly the saving from sacking 120 people earning the average wage of about $60,000 a year. So the cynical among us might argue that the management have sacked the mostly female office staff to pay for a share buyback that will benefit shareholders. But that’s only a claim, not fact, isn’t it? Corporate managements are not that desperate or nasty, are they?

But there is a big reason for the buyback: it’s to avoid the already weak share price coming under future pressure over the next year from falling profits.

The company has to pass on cost increases of 5% to 15% in a flat retail environment to recoup the money spent buying cotton at near record prices earlier in the year (cotton prices have since fallen).

Cotton accounted for 25% of the company’s $574.3 million cost of doing business in 2011. Pacific Brands has already lost Kmart as a Bonds customer (Kmart is buying direct from China), so its retail options are more limited. Myer, David Jones, Target, Big W, Woolies, all hard-nosed buyers and unwilling to give Pac Brands all the increase.

So the next year is going to be rough for Pac Brands and the company warned that profits are expected to fall below 2011 financial year levels. (Net profit before the asset write downs was $103 million for the year to June).

The company resumed paying dividends in the 2011 financial year with a total of 6.2 cents being paid, after no dividend was paid in the 2010 or 2009 years. The lack of a dividend in those years was understandable given the job losses and costs of moving to China, but you’d be entitled to ask why a final of 3.1 cents was paid for the last half of the June 30 year, when 120 staff were to be sacked and the outlook is for falling profits in the coming year. Another bribe for shareholders to keep them acquiescent?

Three fund managers, Orbis, AXA and Franklin Resources, have been the major buyers of Pac Brands shares in recent months. Together they control about 22% of the company’s shares and will therefore benefit from the dividend and the buyback.

Among the directors, CEO Sue Morphett has 1.08 million shares and a director, Andrew Cummins, has 1.3 million shares, so they benefit from the dividend and the impact of the buyback (Remember if a shareholder doesn’t accept into a buyback, the percentage stake in the company rises by the extent of the buyback. In this case, if all 10% of the capital is purchased, their stake rises by that amount).

In good times, a buyback can boost the price of the share, adding to the wealth of shareholders who don’t accept. That means those institutions who accept and then buy back into the shares, help drive up the share price for themselves and other shareholders.

In bad times, a buyback supports the share price (as many companies did during the GFC). In Pac Brands case, it will support the price during a period when the company is expecting a fall in profits.

I don’t know about you, but there’s just a hint of something a bit rich in that, especially when 120 people lose their jobs at the company seeking to support its share price.

In the end, much of the money that will be used to support Pac Brands (and invested in it) is the superannuation of millions of Australian workers. Is that a “win-win” situation for all concerned, as the management gurus like to tell us so much of business can be?

Peter Fray

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