Why Shares of GrafTech Are Falling Today

What happened

Shares of graphite materials producer GrafTech International (NYSE: EAF) fell more than 10% on Thursday after the company’s majority shareholder launched a secondary offering to sell down its stake. The sell-off adds to the woes the company’s shareholders have experienced since its April 2018 initial public offering, with the stock now off more than 17% from the IPO price.

So what

GrafTech on Thursday morning announced majority shareholder Brookfield Business Partners had launched a secondary block trade to sell 11.18 million GrafTech shares to Morgan Stanley. Subject to the completion of the block trade, GrafTech was set to repurchase $250 million in shares from the selling stockholder at the price per share paid in the block trade.

GrafTech’s graphite electrodes are used in the production of steel. Image source: Getty Images.

The company said the repurchase is consistent with what management telegraphed to investors regarding potential uses of cash flow.

“GrafTech is pleased to announce the repurchase of a meaningful amount of its shares in-line with GrafTech’s capital allocation strategy,” CEO David Rintoul said in a statement. “As we’ve previously indicated, we view share repurchases as a tax-efficient and accretive use of cash.”

Brookfield took GrafTech private in August 2015, returning the company to public markets in April 2018 via an offering of 35 million shares priced at $15 apiece. As of Sept. 29, the investment company held 229 million shares of GrafTech and would remain the majority owner even after this sale of 11.18 million shares.

Now what

Investors shouldn’t treat Brookfield’s action as an indication it is souring on GrafTech, as the company seemingly is taking a patient approach to recouping its investment instead of rushing for the exits. Coupling the sale with a GrafTech buyback limits the reduction to Brookfield’s overall ownership percentage.

A large shareholder tends to be an overhang on a stock precisely because of the downward pressure that shareholder can put on shares as it sells down it stake, and GrafTech is following a pretty standard playbook in trying to repurchase shares to minimize that pressure.

The bigger question for long-term holders concerns global graphite demand and pricing. GrafTech is one of the two largest producers of graphite electrodes, used in steel production, outside of China, accounting for about 24% of non-Chinese global production capacity.

If the global economy (and with it demand for steel) can hold steady or improve, Brookfield and all other shareholders have the opportunity to see higher prices in the quarters to come.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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