A Fairfax media column published yesterday and again overnight suggests that Domino’s Pizza Enterprises Ltd. (ASX: DMP) CEO Don Meij could be at risk of a margin call. A margin loan is a facility where a person can borrow against the value of their shares to buy more shares. However, if the value of shares falls, the borrower must inject more cash, or transfer more shares as ‘collateral’ to cover the losses. A ‘margin call’ is where the shares have fallen below a certain threshold and more money must be injected immediately, or the shares will be sold to…
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A margin loan is a facility where a person can borrow against the value of their shares to buy more shares. However, if the value of shares falls, the borrower must inject more cash, or transfer more shares as ‘collateral’ to cover the losses.
A ‘margin call’ is where the shares have fallen below a certain threshold and more money must be injected immediately, or the shares will be sold to cover the losses.
The Fairfax columnist asserts that CEO Meij has 5 separate margin loan accounts and implies that the margin loans may be under stress as Meij reportedly placed a mortgage on his house and transferred more shares to a family trust.
Columnist Joe Aston stated:
“ Confirming our avowal that Domino’s is flagrantly using shareholders’ money to prop up its share price, its broker Morgan Stanley had a standing order on Monday to buy any share available below the price of $40 (freakishly – or not at all – the stock closed at precisely $40; what do you reckon Meij’s trigger price is?)”
Shareholders may not be able to determine the truth of the Fairfax allegations either way, but Domino’s confirmed yesterday that its CEO had a margin loan facility, and stated:
“The Company confirms that it considers that at no time has there been a risk of triggering a margin loan associated with the Managing Director, Mr Don Meij. The Company reiterates that it has not bought shares under the share buy-back programme at the same times at which Mr Meij was selling shares.”
Don Meij owns 2 million Domino’s shares, which is several times Domino’s usual daily trading volume. If Meij is forced to sell, he owns enough shares that it will likely crush Domino’s share price, at least for a while. This is relevant because at times like these, where a vulnerability may exist, the market can push shares against a company.
For example, some short sellers and shareholders may start selling now to avoid getting caught in the sell-off if Meij’s shares are forcibly sold in a margin call. The selling activity can put pressure on the price, forcing it lower and making it more likely that a margin call is triggered, becoming a kind of self perpetuating event.
None of that means that Domino’s is a good or bad investment, but there are certainly market events that may push its shares a lot lower in the near term. From an investment perspective, it does seem pretty questionable that Domino’s is buying back shares at roughly the same time that the CEO is selling.
I would be inclined to watch and wait how this one plays out. If you are interested in buying Domino’s shares, you might get lucky and be able to get some on the cheap.
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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.