On Jan. 15, 2014, SMG management prepaid $200m in 7.25% senior notes due Jan. 2018 at an effective 3.8% YTM, after they had publicly announced intentions to call the sr. notes as early as Dec. 13, 2013, when the stock traded at $60. On SMG's Investor Relations page, the last posted conference presentation prior to Dec. 13, 2013 is from the CL King Best Ideas Conference held Sept. 12, 2013 in which no mention of the sr. note early call appears and the stock traded around $55.
This suggests that sometime between Sept. 12, 2013 and Dec. 13, 2013, when SMG traded between $55 and $60, SMG management decided they'd prefer to prepay $207.5m in sr. notes at an effective 3.8% YTM rather than repurchasing SMG shares in the open market. And though they financed the early sr. note call with the revolver, the opportunity cost of calling the notes early was NOT using the $207.5m to repurchase stock.
As an SMG owner, do you think think a MAXIMUM 3.8% annual return return one can reasonably expect over the next 4 years justifies the risk of owning the stock at $57?
Hint: SMG management has already answered this question emphatically through tremendous insider selling.
Please see the following Excel sheet for backup and sources: d284f45nftegze.cloudfront.net/GorgeSPhat...
Disclosure: The author is short SMG.
Additional disclosure: I own 4 SMG put options.