On the buyback, this isn't RAC flushing money down the toilet. Management are have told us that they are buying shares back when the price is such that it doesn't reflect the outlook of the company. If this is correct, each share purchased by RAC at $2.10 (or whatever price) should be adding more than $2.10 of long term value to RAC... i.e. it represents a transfer of value from the person selling the share back to the company buying that share. In addition, with every share bought by RAC, remaining shareholders can celebrate their increased percentage ownership in the company.
In this context, I think the only way the buyback should be seen as a failure is if what management have told us isn't true (i.e. they're actually plugging holes in a sinking ship) or if it forces the company to raise further capital down the road at lower prices before the value of the buyback can be realised. I'm happy to trust that management aren't lying to us and have planned this out financially.
Although not explicitly stated, I think it's implicit that the buyback is also there to try to provide some support to the share price through a period of market weakness, biotech sector weakness, and downward pressure on the share price due to ongoing supply from a substantial shareholder looking to exit their position. You may be totally correct and market forces do come further into play and result in significant supply of RAC shares coming onto the market at potentially much lower prices. In this case I think the worst that can be said is that RACs timing wasn't perfect and they could have captured more value in the buyback and/or completed it a lower cost. However management can't predict the future and can only make decisions based on the data they have available at the time, as with any other business decision they make. Hindsight is always 20/20, but we don't have the benefit of that when we are making decisions in real time. Although they can't control what happens in the market overall, I would assume though that RAC management have planned for various potential outcomes of the buyback and have contingencies in place to manage it under a variety of market circumstances. To me, the ideal outcome would be to pace the buyback to at least see BG finish selling his position and to be able to offset that ongoing daily supply that he provides. I think the worst case would be for others to quickly sell 4 million shares into the buyback and for BG to still have 2 million shares outstanding. Once BG has finally exited his position, I look forward to us all discussing the effect that his selling did or didn't have.
In regards to the overall economic outlook, markets at this point potentially seem to be looking forward to rate cuts (and perhaps even more QE) starting next year. Given the extreme levels of debt and leverage in the system, the interest rate increases we've seen may well very rapidly tip the global economy into recession. In this case it may be just as likely that its a constructive environment ahead for stocks and other risk assets instead of the scenario you have presented.
RAC Price at posting:
$2.10 Sentiment: Buy Disclosure: Held
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