Caledonia Investments could see its stock price soar by more than 35% if restrictions on share buybacks are lifted, according to fund manager Brian McCormick. Caledonia invests in privately run companies and funds and publicly listed companies such as Microsoft , Oracle , Moody’s , Philip Morris , and British American Tobacco . The company, which trades as an investment trust on the London Stock Exchange, says it has assets worth £3 billion ($3.8 billion). The stock is also traded over the counter in the United States. McCormick, who runs the Jupiter Global Value fund at Jupiter Asset Management, said Caledonia’s share buybacks are limited due to restrictions in share ownership as set out in the U.K.’s Takeover Code. The Code is created to safeguard the interests of minority shareholders by making it challenging for a significant minority shareholder to become a majority shareholder. The Code makes it necessary for any shareholder who wants to own 50% or more of a company to make an offer to buy out all the remaining minority shareholders. While the Code serves an important purpose, McCormick said that in Caledonia’s case, it is preventing the company from taking actions that would benefit all shareholders. “There is a catalyst here if the company can remove the restriction that is preventing them from buying back their own stock in a meaningful way,” McCormick told CNBC Pro at the London Value Investor Conference on May 15. CLDN-GB YTD line How will buybacks help? With Caledonia’s shares currently trading at a substantial discount to net asset value (NAV), McCormick said, “it would be very, very accretive for the company to use more of its own cash to buy back stock.” NAV represents the value of an investment fund’s underlying assets. Caledonia’s NAV at £53.69 per share would mean that the market is currently undervaluing the company by about 37% as its stock trades at £33.75 per share. In theory, this means that if the fund is liquidated and wound down, the cash returned would be 37% more than the fund’s stock market value at the current time. In addition, when the fund performs a share buyback while its stock trades below its NAV, it is buying its own assets at a 37% discount. Buying back stock also tends to raise the share price. Caledonia’s buyback limits When a company buys back shares, those shares are canceled, which can increase the percentage ownership of remaining shareholders. In Caledonia’s case, the Cayzer family and related parties currently own under 49% of the company’s shares. If that ownership level were to rise above 50% as a result of buybacks, it would trigger the Takeover Code provisions. Caledonia’s Chief Financial Officer Robert Memmott acknowledged the restrictions on buybacks but said the company will continue to repurchase shares within those limits. “During March and April, we purchased 290,000 shares at an average discount of 36%, which is accretion to NAV per share of £0.101,” he said on the company’s earnings call last week. “And we will continue to repurchase, but within the restrictions which we have.” Analysts also agree that Caledonia’s limits on share buybacks right now are holding back the share price. “[The shares trading below NAV] does offer some value, but we always expect the discount to be relatively wide given the size of the Cayzer family concert party and this is also a factor that limits the size of any share buybacks that can be undertaken,” said Stifel analyst Iain Scouller in a note to clients on May 21. Can Caledonia gain approval? In certain exceptional circumstances, the Takeover Panel may be willing to grant a waiver allowing Caledonia to repurchase additional shares, even if doing so would make the Cayzer family a majority shareholder. One such exception is designed for distressed situations where a business needs money in a hurry and a significant shareholder is willing to bail out the business in exchange for more shares. Under normal trading conditions, the Takeover Code would prevent the company from issuing more shares to the shareholder, which would cause an increase in ownership level. McCormick said Caledonia needs to work directly with the Takeover Panel to find a solution. He added that, even as a minority investor in Caledonia, he would be supportive of any potential moves by Caledonia to seek permission from the Takeover Panel. “[The company] needs to get the Panel onside to obtain a Rule 9 waiver which would allow them to buy back shares much more aggressively,” McCormick said referring to the rule that is holding back buybacks in this case. “The Panel has the authority to grant approval for this in exceptional circumstances and there is a very clear win-win here for all shareholders. We just need a waiver and some increased protections for minority shareholders to be structured appropriately.”
