This is a little about Panera and a little about the current state of debt and buybacks. As you’ll recall, Luxor Capital gave Panera a call a couple weeks ago and convinced the company to raise debt to fund a buyback.
Panera was a primary activist target in the fast casual space, if only because it had a down year in 2014 -- its first down year since 2007. And inching closer to 2,000 stores, growth is naturally slowing.
Its dual class structure has dissuaded most activists, but Luxor’s smooth Christian Leone can talk the pants off almost anyone. Panera’s class B shares have 3x the voting power of A shares. And almost all the B shares were owned by founder Ronald Shaich.
Luxor’s last venture in the restaurant space proved worthwhile, with BJ’s Restaurants up 50% since.
The details include Panera planning to buyback $500mm in shares over the next twelve months. Funding this buyback is a $500mm debt issuance. The ease with which Panera decided to raise debt reminds me of Stan Druckenmiller’s comments:
“In 2006 and 2007, which I think most of us would agree was not a down period in terms of speculation, corporations issued $700 billion in debt over that two-year period. In 2013 and 2014 they've already issued $1.1 trillion in debt, 50 percent more than they did in the '06, '07 period over that same time period. But more disturbing to me if you look at the debt that is being issued, back in '06, '07, 28 percent of that debt was B rated. Today 71 percent of the debt that's been issued in the last two years is B rated. So, not only have we issued a lot more debt, we're doing so at much less standards. Another way to look at that is if those in the audience who know what covenant-lite loans are, which are loans without a lot of stuff tied around you, back in '06, '07 less than 20 percent of the debt was issued cov-light. Now that number is over 60 percent.”
Then on using debt to fund buybacks:
“Last year corporates earned $2.5 trillion in operating cash flow. They spent 1.7 trillion on business and capital equipment and another 700 billion on dividends. So, virtually all of their operating cash flow has gone to business spending and dividends, which is okay. I'm onboard with that. But then they increase their debt 600 billion. How did that happen if they didn't have negative cash flow? Because they went out and bought $567 billion worth of stock back with debt, by issuing debt. So, what's happening is their book value is staying virtually the same, but their debt is going like this.”
"Look, if you think we can have zero interest rates forever, maybe it won't matter, but in my view one of two things is going to happen with all that debt. A, if interest rates go up, they're screwed...”