Though Vox lost its cash by betting on single stock futures (SSFs) and contracts for difference (CFDs), Huge is trying to play down the risk involving its own gamble on those derivatives.
Between July and October last year, Huge bought CFDs and SSFs representing 12,3 million ordinary shares in Huge at an average of 360c each, which was roughly their market price at the time. That has created future funding obligations of R4,5m.
As well as taking that future gamble, Huge also bought back about 5,6 million shares for cash on the open market. Huge says those cheaper cash purchases left it with an overall exposure to 17,9 million shares at an average price of 289,7c each.
The tactic had ensured future share buybacks would cost no more than 289,7c each, CEO James Herbst said yesterday. Though he said that was well above the value, he insisted it was well below the weighted average price at which Huge had traded since listing in August 2007.
When the board approved the action last June, the shares were trading at 395c and the forward earnings yield exceeded the forward cost of debt capital. Because of the credit crunch Huge could not raise traditional debt to pay for the repurchases, so it used the JSE's Safex-guaranteed SSF and general CFD mechanisms available in the market.
That hedged the cash-flow risk of repurchasing its own shares at some point in the future at an unknown price, Herbst said. Since Huge generated more than R4m a month in earnings, it seemed nonsensical to have to wait 13 months to accumulate enough money to repurchase its own shares for cash at a price that could not be fixed in the present, he said.
The tactic had been a good way to buy back its own shares, he said, and had not involved the risks that had burnt others. “We have always understood the pitfalls inherent in using SSFs and CFDs. Our decision to gain exposure to the ordinary shares in our company was never a gamble on the upside performance of the share.”
Source: Business Day
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