Barón de Ley is a small cap Spain-based viticulture company, with €460 million market cap. It produces its own grapes (also they buy to other agriculturists), processes the wine and commercializes it. Its wine is certificated as Denominación de Origen Calificada (D.O.Ca.) Rioja, which stands for one of the best types of wine in Spain.
The company doesn’t grow substantially, because Rioja D.O.Ca. productive area is limited by the regulators, and thus, the company cannot invest in organic growing. The management doesn’t like acquisitions (or unless, that shows its history), so there is no chance of growing rather than in productivity (with a limit fixed by the regulator), margins expansion and prices, which are difficult areas to grow relatively high in the long run.
Nevertheless, or because of that lack of investment opportunities, Barón de Ley generates a high free cash flow, which allows the company to have an extraordinary financial position, with €153 million net position (2nd semester 2017), with assets distributed between cash, long term debt and short term financial assets.
The strategy of the management to create value to its shareholders is repurchasing its own shares with the available cash when the stock market price decreases. Therefore, the accumulation of cash generated has the objective of reducing the number of shares to increase per share results. The management has never distributed dividend.
Barón de Ley faces an extraordinary situation in the following years: if the share price is above the management’s share value, they shouldn’t buyback its own shares, so they are going to accumulate cash and financial assets. If that is the case, the company is going to become a financial management firm rather than a cellar, and that won’t create value to its shareholders. Otherwise, if the share price decreases under the share value, the company is likely to repurchase shares, but this would lead to a problem: the main shareholder, Eduardo Santos-Ruiz Díaz, owns the 47.847% of capital, and if the company amortizes more shares, he would exceed the 50%, so he would have direct control over the company. In that case, the Spanish law forces him to do a public takeover offer to acquire the whole company, that is, the other 50%, at a fair value.
Thus, if the main owner doesn’t want to do that, nor sell a part of his stake, the repurchase of new shares is not an option, so the company should start distributing dividends or investing in acquisitions to avoid becoming an investment company.
Thus, the alternatives for the following years are: 1) Eduardo Santos-Ruiz Díaz makes a public takeover offer to the rest of shareholders, 2) Eduardo Santos-Ruiz Díaz sells some of his shares, 3) the company invests in acquisitions, 4) the company distributes dividends, and 5) the company become an investment management firm.
The final decision corresponds to Santos-Ruiz since he is not only the responsible for this situation, but also the CEO of the company.