Why One Old Stock Buyback Trick Is Working So Well for AbbVie

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AbbVie Inc. (NYSE: ABBV) had been used to its stock rising for long enough that it must have felt a bit traumatized when its shares fell from around $120 earlier in 2018 to just under $90 before stabilizing. Now the company is trying one of the older and less-used efforts to drive its share price back up. AbbVie is pursuing a modified Dutch tender auction for up to $7.5 billion worth of common stock.

AbbVie signaled back on April 26, along with earnings and guidance, that it intended to commence a self-tender offer for up to $7.5 billion worth of common stock. What was not known back then was the price band that it would use. AbbVie also signaled that tender offer to repurchase shares was within its existing $10 billion buyback plan announced back in February of this year.

The new press release indicated that AbbVie would accept tenders for prices between $99 and $114 per common share. The company will then determine the lowest price within the range, which will allow it to purchase a total of $7.5 billion worth of its common shares.

As this is not a new share buyback plan, some investors have to wonder why the shares popped up so much if it was known news. The rise is most likely due to the price range of $99 to $114 being so far above the prior close of $96.55, and the median point of the range would be closer to $106.50. A quick look at StockCharts.com also showed that AbbVie’s 200-day moving average was down at $92.76 and that its 50-day moving average was up at $102.37.

Investors need to understand that modified Dutch auctions start higher and go lower, and the aim is for the buyer (AbbVie) to find the lowest point at which sellers are willing to sell. If that turns out to be a theoretical $103, then the company may have established that any share price in the $90s was too low. Then again, some investors may be wondering if $114 is the most that AbbVie is willing to pay to buy its own shares now or in the near future.

Modified Dutch tender auctions tend to act as is an accelerated share buyback. It still should be considered that this finalized plan is within the existing buyback plan. And then again, the “up to $7.5 billion” has to be kept in mind as the company is not obligated by any laws to purchase the full amount.

The tender offer and withdrawal rights will expire at midnight Eastern Time, at the end of the day on May 29, 2018. AbbVie did say that the expiration time is “unless extended or terminated by AbbVie.”

AbbVie told its shareholders that they may tender all or a portion of their shares at a specified price of their choice within the $99 to $114 price range. AbbVie will then determine after the tender has expired the lowest price within the range $99 to $114 price range that will allow the company to purchase up to an aggregate of $7.5 billion of its common stock. When it issued the notice of a coming tender in April, AbbVie’s release said:

AbbVie is announcing today that it plans to commence a tender offer to purchase for cash up to $7.5 billion in value of shares of its common stock through a modified “Dutch auction” tender offer at a specified price range to be determined. AbbVie expects to commence the tender offer as early as May 1, 2018… The tender offer forms a part of AbbVie’s $10 billion stock repurchase program announced on February 15, 2018.

Traditional buybacks are determined by a company and by its advisory agents. Modified Dutch auctions are for up to a fixed amount, and the price is subject to the shareholders’ decision, for how much they are willing to sell. Modified Dutch tender offers have not been utilized as much in recent years, but so far shareholders seem keen on the mid-point of the price range being almost $10 higher per share than the prior day’s close.

AbbVie shares were last seen up 6.6% at $102.93, in a 52-week trading range of $64.61 to $125.86. The consensus analyst price target from Thomson Reuters was closer to $119.50.

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