I just came across the following WSJ blog entry that refers to the SAP investor presentation.
http://blogs.wsj.com/cfo/2017/01/25/for-sap-debt-…
For those of you who are not familiar with SAP – it is a very big multinational software company (predominantly German, however). It is an innovative and successful company that is well positioned in various big and growing markets with plenty of good projects to invest in. It is also well positioned in the older, mature industries that are slowing down, being replaced by everything that is cloud based etc...
It has EBIT of 5.125 billion Euro and FCF of 3.63 billion Euro.
It pays taxes at effective tax rate of ~25%, which amounted to 1.230 billion euro in 2016.
In this investor presentation (a conference / phone call) it was presented by the CFO that in 2017 it would try to reduce debt by approx. 18% and to become debt free company in about two years.
“the company plans to reduce its group debt by €1.4 billion ($1.5 billion) in 2017. As of Dec. 31, SAP’s group debt was €7.8 billion.“
Theoretically SAP can load additional 15 billion Euro of debt and still keep its AAA rating, especially in this low interest rate environment.
What can be the “real world” consideration for such “debt free” financial policy?
(it does contradict the assumption in the financial theory that the company tries to minimize its payments to governments and redirect these cash flows to investors, creating value by doing so).
What am I missing?
good thread, bump
European companies don't buy back stock nearly as often as US companies. They might not want to raise dividends much, or might not have many attractive acquisition targets.
However, they could also be delevering now because they think they could make a big acquisition in a couple years and really want to lever up to do so at that time.
interesting thread, but not that uncommon. Alphabet has practically zero debt and facebook does not have any debt.
they probably don't have an effective use of debt, and leverage for the sake of leverage is a terrible policy. Same goes for M&A activity. There is something to be said for a mgt. team strictly interested in the longevity of the company
As others have stated, the Company likely does not need the debt and so it would be an improper use to have it on the balance sheet.
That being said, one could argue that companies such as Alphabet and Facebook could use incremental debt financing to help fund tuck-ins, capex spend on R&D, etc. (they would likely get cheap financing as well). I'm a big proponent of placing debt on the balance sheet so long as a company prudently uses the funding to advance the company (not a fan of large dividend to owners) via investments and leverage is minimal. Extremely subjective to what is a proper amount of leverage, but I personally believe that a LTV of 30% or lower (30% or less of EV in debt; e.g., 10x EBITDA EV company with 3x EBITDA or less of total debt) is an effective way to capitalize on company's structure and reduce tax burden.
1) What's wrong with paying out dividends to owners? Isn't that the point of it all? In what circumstances would you approve of large dividend payouts, or do you categorically oppose it? If the latter, why? 2) The proper leverage ratio isn't a subjective matter at all. It's a derivative of your cash flow volatility, bankruptcy costs and net gain from leverage. It's a matter of economics.
In short most of the market is not a fan of dividend recaps - the company raises debt and pays out a portion of the sources to the owners which results in some leakage of funds (other uses are what's important to company growing or whatever source of financing). Also incentivizes mgmt. / sponsor to spend less time on the company since they have less skin in the game. Pretty easy to do some research and see there are different thresholds for dividend recap deals so won't go into it.
2 - Not to sound rude,, but this is a pretty rudimentary point. If the market wasn't partly subjective then there'd be no way of outperforming the market. Most people think the market is semi-efficient. Point being is that there isn't some magical leverage point that every company knows and puts on their balance sheet. Otherwise, this topic wouldn't have been started in the first place because people can argue that there should be debt on the balance sheet of the companies discussed in this thread when there isn't. My response was a personal view on LTV, everyone will have their own view on what leverage should be. Pretty easy to say it's a byproduct of all the factors you said, but there's also a human aspect to a company's performance. Understand your point, but the real world is subjective - different sponsors or public companies will have different views on what leverage should be.
High level: Internally generated funds > debt issuance > new equity issuance in terms of cost-effectiveness and signal to the market.
Zero debt in a capital structure may be okay, as long as the company is using internal generated equity/funds to run the business (meaning they aren't accessing the capital markets for equity issuances etc.) if they get cash strapped. Less debt = less interest payments = one less use of funds the company worries about.
A little leverage might not hurt the company as it often forces managers to prudently deploy the capital, realize a return, and repay on-time (you're contractually obligated to pay back debt) as opposed to other sources (plus some leverage optimizes capital structures to reduce capital deployment cost, e.g. the WACC).
LT solvency rations (net debt / EBITDA etc.) all depend on the industry, business environment, and company-specific factors (5x vs. 3x is all relative).
There's absolutely zero substance in this response. Generalities without even an attempt to relate it to the subject matter. Yeah, "zero capital structure may be okay," but is it in this case? And if so, why? And yeah, we know that less debt = less interest payments, but it often also means higher growth at a lower price (relative to other forms of financing).
It may be pursing an exist strategy through a strategic acquisition via financial sponsors. As such, it may be trying to maximize its debt capacity.
At tempora laudantium dignissimos tempore minima. Corrupti eaque labore et magnam voluptas quis maiores. Quo illum inventore est ut nemo harum necessitatibus delectus. Necessitatibus quisquam nisi quia.
Ut consequatur esse dolores voluptatum sit natus vel. Corporis et et fugit voluptatem consequatur aliquam expedita sunt. Possimus quae fuga sed aliquid asperiores culpa. Maxime dolores tenetur commodi aut expedita ut. Et mollitia sed est velit quaerat quia facere.
Similique deleniti atque voluptatem dignissimos non delectus. Dolorem non optio nostrum laborum sed. Accusamus id quo eveniet velit. Recusandae voluptas quia fuga non enim est.
Consequatur amet quo exercitationem deserunt magni ea. Ipsa officiis consequatur non non animi iste.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...