Along with a larger than expected profit announcement, Woolworth’s last week had also announced they were going to return $700 million back to shareholders through an off-market share buy-back.
Whilst these were popular a few years ago, the Global Financial Crisis brought about a couple of years of capital conservation. In this blog, we will revisit the concepts of an off-market share buy-back and look into the Woolworths buy-back a little more indepth.
We have invited one of our financial advisers, Alfred Hung to answer some general questions in relation to share buy-backs:
1. What is an off market share buy-back?
An off market share buy-back involves a company inviting eligible shareholders to offer to sell their shares in that company within a certain timeframe and usually at a discount to the current market price. The shares bought back are cancelled reducing the number of shares the company has on issue.
2. Why do companies implement an off market share buy-back?
Companies undertake buy-backs to undertake some sort of capital management exercise – whether it be to improve earnings per share, return on equity for shareholders or return on assets. The company utilises a buy-back to return surplus capital to shareholders.
3. What happens in an off-market buy-back?
An off-market share buy-back allows a company to buy-backs shares at a discount rate compared to the market price. In the case of the Woolworths (WOW) buy-back, shareholders have been asked to tender some or all of their shares at discounts between 8% and 14% to the Market Price . The number of shareholders participatiing will influence the discount that WOW will be buying the shares back at.
4. Should I participate in the buyback?
The answer to this question is dependant upon each person’s/entity’s individual circumstance. Generally the buy-back price will incorporate a capital component and a dividend component.
Accountants and financial advisers generally focus on the dividend component in determining whether or not their clients should undertake these exercises. This is because generally the dividend paid is a fully franked dividend meaning that there could be imputation credits coming back to the client.
I would recommend that those thinking of participating in this buy-back should seek their own independent advice before proceeding.
5. If someone nominates a 10% discount and I nominate a 14% discount, if we are both accepted into the buyback, will I get back less money as I have nominated a larger discount percentage?
No, the buy-back has been designed so that all shareholders whose tenders are successful will receive the same buy-back price.
6. Do I need to pay brokerage?
Generally no brokerage is payable for participating in the buyback. WOW has indicated that no brokerage will be payable for participating in the buyback.
7. Is it compulsory?
No. Participation in the buy-back is optional.
8. How do I participate?
WOW will shortly be sending out buy-back documents for shareholders to complete. Those shareholders wishing to participate will be required to complete a tender form which will need to be submitted to the WOW share registry before the closing date being 8th October 2010.
9. When do I know if I have been successful?
WOW will be announcing the final buy-back price and scale back by the 11th of October.
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http://econfs.com.au/woolworths-announces-market-buyback/
If you have to hold the shares for 45 days from the ex-date to claim the franking credit on the Woolworths dividend, how can you claim the franking credit when Woolworth have done the off-market purchase of your shares?
Hi Toby,
The ATO requires the shares to be held ‘at risk’ for a minimum period of 45 days prior to the date which Woolworths’s determines the buy-back price and buy-back allocations.
Therefore it is not the ex-date which we look at rather, it is the length of time the shares are held ‘at risk’ for. If you purchase Woolworth shares after the 27th August 2010 and submit them into the buy-back, the shares will not be at risk for 45 days and therefore cannot claim the franking credits.
I don’t understand why I would sell my shares at a discount to market price. Why not just sell them at market?
Hi Elise,
The dividend part of the payout comes with a franking credit equal to 3/7ths of that net dividend. If you add that to what Woolworths is paying it will come to more than the price you can sell the shares for.
Hi Elise,
Whilst on the surface, selling your shares in the off market buyback at a discount to the market price may seem strange and unattractive.
However, what sets off-market buybacks apart is the fact that the final sale price has two components.
The first portion is the deemed capital component which the Australian Taxation Office has indicated would be $3.08. This could potentially allow investors to realise a capital loss instead of a capital profit on which capital gains tax is payable.
The second component is a fully franked dividend (anything in excess of the capital component). The fully franked dividend and its associated imputation credits can make it very attractive for investors on lower tax rates.
Before accepting this offer, I would recommend that you seek professional advice. Perhaps you would like to give us a call on (02) 9011 5338 so that we can analyse your specific situation in more detail.
Based on information above, is selling the WOW shares in the buy-back the preferred option, if the shares are in a SMSF which is in the pension phase?
Hi Ted,
In general terms, a complying SMSF in pension phase is generally tax free. This means not only will the fund not have a requirement to pay tax, but may also be entitled to a refund of any imputation credits.
In this instance, as such a large portion of the buyback is a fully franked dividend, it may lead to a beneficial outcome.
In saying that, however, there are other factors you need to take into consideration such as the superannuation fund’s investment strategy, overall investment goals and even tax considerations – such as the 45 day holding rule that we had discussed about above. I would advise that you seek professional advice so that they can consider your overall situation before advising if this is the best option for you.