Reebok, Campbell Soup Borrow for Stock Buybacks

Campbell Soup and Reebok International both recently turned to the hungry bank-loan market to outfit their capital needs for sizable stock buyback efforts.

Credit Suisse led a $1.39 billion loan for Reebok's repurchase and retirement of about one-third of its common stock.

J.P. Morgan & Co. and Chase Manhattan Corp. are leading a $2.5 billion loan for Campbell Soup to repurchase 18 million of its shares.

Some bankers said, despite the robust stock market, they anticipate other companies will also seek bank loans to institute large buyback programs.

"I expect this buyback trend to continue and in fact to accelerate," said Joseph V. Rizzi, a senior vice president and managing director in structured finance at ABN Amro North America.

ABN Amro acted as a co-agent in the Reebok transaction.

"This is an area we are targeting," he said.

Mr. Rizzi said the buybacks have hit the market in the late stages of a booming business cycle, as companies continue to generate cash but do not necessarily want to expand their businesses.

Some experts, particularly in areas like the banking industry, have said that sizable buybacks reflect management's inability to find additional sources of revenue. These companies, as a result, might have little immediate growth potential.

Reebok executives, however, said that the buyback reflects a low stock valuation.

"The situation with the valuation of Reebok's stock has been different than the general trend of the equity market over the past few years," said Leo Vannoni, Reebok's treasurer. "We felt that the market was significantly undervaluing our stock."

Mr. Vannoni said that Reebok chose bank debt to fund the buyback because of the flexible terms and conditions it afforded and because of Credit Suisse's speedy commitment of funds.

Bank loans have set pricing and can be paid back quickly, he said.

The bank market is receptive to the deals.

Mr. Vannoni said 90% of Reebok's deal was closed within five days, and co-agents committed within two.

"The fact that the bank deal was syndicated successfully gave a signal to the equity market that the deal was not in jeopardy because of the financing," he said.

The run-up in stocks that has sent the Dow Jones industrial average to record-breaking levels has made share buybacks unnecessary for many companies.

Additionally, using bank loans to repurchase equity typically puts a company's debt ratings in jeopardy.

Nonetheless, cash-generating companies like Campbell Soup and Reebok do not typically have significant problems with the increased debt burdens.

Mr. Rizzi said banks would have a harder time with cyclical corporations like chemical companies and retailers.

Companies used to replace equity with debt in the 1980s to defend against leveraged buyouts. By adding debt, they could drive down the value of a takeover.

"This was not a takeover defense measure," Mr. Vannoni said. "This was a situation where we saw the equity as being undervalued."