The acquisition of Woolworths is a “no brainer” for some shareholders
For some of Woolworths’ 370,000 shareholders, the $ 2 billion off-market share buyback is an absolute bargain. It’s a “no brainer”. Due to the lower capital component and the higher franked dividend, it is even more attractive than the CBA’s $ 6 billion stock buyback (which closes on Friday).
In this article, I’ll analyze the numbers to show who should take and who shouldn’t. And if you agree, what are your options for reinvesting the money?
Before we get to the numbers, let’s recap what makes “off-market” share buybacks and how Woolworths structured that buyback.
What is the particularity of an “off-market” buyout?
There are 2 main types of redemptions. A “market” buyback is made on behalf of the company by a broker buying the shares on the ASX. The other type is an “off-market” buyout. This is carried out through a call for tenders and, provided it is an equal access system, allows a company to distribute excess franking credits to its customers. shareholders.
It is this distribution of franking credits that makes redemption “out of the market” special. A part of the proceeds of the sale is treated as a franked dividend, the other part being treated as an item of capital. In effect, the shareholder obtains an oversized dividend with postage credits and a significantly reduced selling price for capital gains tax purposes. This makes the “off-market” redemption tax advantageous for some shareholders, and because they are willing to accept it, it means that the company can buy the shares below the market price on the ASX.
Acquisition of Woolworths “off-market”
Shareholders will be offered the opportunity to participate and tender all, some or none of their shares, the offer closing on Friday, October 15 at 7 p.m.
The offer will be at a discount from the market price, within a range of 10% up to a maximum discount of 14%. Since the buyout is capped (the $ 2 billion is roughly 4.6% of Woolworths’ common stock), Woolworths will accept offers from shareholders offering to sell at the lowest price (highest discount) and reject those who do. offer to sell at a higher price (lower discount).
There are two components to the redemption price – a capital component of $ 4.31 and the balance as a fully franked dividend. If the market price of Woolworths shares is (for example) $ 40 and the bid discount is 14%, then the repurchase price will be $ 34.40. This will include a capital component of $ 4.31 and a fully franked dividend of $ 30.09 per share.
The repurchase price will be the same for all offers – so if the repurchase is cleared with a 10% haircut (which in this case is highly unlikely), shareholders who appoint haircuts of 11%, 12%, 13% , 14% will be withheld and receive the prize with a 10% discount. Rather than offering a% discount, shareholders can also offer a “final price” (take whatever the market balances). As a pro-rata reduction is likely, Woolworths announced a few priority rules – an allowance to each successful bidder for its first 180 shares.
The market price will be determined by calculating the volume-weighted average price of transactions on the ASX during the 5 trading days immediately preceding the closing day, i.e. from October 11 to October 15. The announcement of the repurchase price and a possible scale will be made on Monday, October 18.
Shareholders worried about the Woolworths share price during the buyback period may eventually set a minimum price (between $ 32.00 and $ 35.00). If your discount is accepted (this also includes “end price” offers), you will only be accepted if the redemption price is equal to or greater than your minimum price.
Should we accept?
The principle is that you must accept the redemption if your effective selling price (after tax) is higher than what you could get by selling the same shares on the ASX. If you feel like you want to keep your stake in Woolworths, just buy them back on ASX.
Let’s compare the two alternatives – sell your shares on the market for $ 40 or sell your shares on redemption.
We will do this from the point of view of an SMSF in retirement phase paying a tax at 0%, of a super fund in accumulation phase paying a tax at 15% and of an individual paying a tax at the marginal rate d. highest tax of 47%.
Because we have to take into account the impact of the capital gains tax, we will demonstrate the result where the shares were purchased for $ 15.00, and also where the shares were purchased for $ 30.00.
We will also make these assumptions:
- Due to overwhelming demand, redemption is allowed at the maximum bid discount of 14%;
- The market price is $ 40.00 and the redemption price is $ 34.40;
- The redemption price includes a capital component of $ 4.31 and a fully franked dividend of $ 30.09. It is attached to $ 12.90 in postage credits;
- For capital gains tax purposes, the sale price is deemed to be $ 9.91. This will apply to all shareholders and is determined by the ATO after the completion of the buyback. This is essentially the market price minus the franked dividend. Woolworths will announce this award shortly after the buyout ends.
Three examples are presented:
- Example 1: 0% taxpayer
- Example 2: 15% taxpayer (assumed to be a super fund eligible for the CGT discount of 33.3%);
- Example 3: 47% taxpayer (assumed to be an individual eligible for the 50% CGT rebate).
In each example, there are two purchase prices: $ 15 and $ 30. Columns 2 and 3 compare the after-tax proceeds of a market sale at $ 40 and participation in the redemption, assuming a purchase price of $ 15, and columns 4 and 5 compare the after-tax proceeds of a market sale at $ 40 and participation in the repurchase, assuming a purchase price of $ 30.
The total product is the sum of the dividend component and the capital product.
In the first example, because the tax rate is 0%, the postage credits are fully refundable in cash. There is no tax payable on a capital gain, nor the possibility of applying a capital loss to offset another capital gain.
Example 1 – 0% taxpayer
In the second example, the tax rate is 15%. In fact, half of the franking assets are available tax free (without tax payable on the dividend). On the capital side, after application of the discount of one third of the CGT, capital gains are taxed at 10% and the value of a capital loss in compensation for another capital gain is also 10% of the capital loss.
Example 2 – Taxpayer at 15% (assumed to be a super fund)
In the third example below, the tax rate is 47%. There is a net tax payable on the fully franked dividend. On the capital side, after application of the 50% CGT discount, capital gains are taxed at 23.5% and the value of a capital loss in compensation for another capital gain is 23.5% of the capital loss.
Example 3 – 47% taxpayer
For a 0% taxpayer, such as an SMSF in retirement or an individual whose income is below the tax exemption threshold of $ 19,200, this is an absolute “no-brainer” to accept. The effective selling price is $ 47.30 ……… .. $ 7.30 or 18.25% above market price!
For an SMSF or a super fund in the capitalization phase taxed at 15%, this is moderately attractive. It can be worth up to $ 3.86 if you can use the capital loss to offset tax payable on other capital gains or if you plan to sell in the market anyway. If you move on to the retirement phase soon (where your SMSF will pay 0% tax), acceptance is quite marginal.
If your fund is part retirement / part funded, it will generally make sense to agree – the higher the proportion of retirement, the more attractive it will be.
For those who pay taxes at a marginal tax rate of 34.5% or more (the rate goes into effect when your taxable income exceeds $ 45,000), don’t even bother opening the tender offer document. – throw it in the WPB. This “off-market” buyout will not work!
I expect the Woolworths buyback to follow the path of most other “off-market” share buybacks and be heavily oversubscribed and therefore subject to a reduction. The surrender discount will be 14%. Since all successful bids receive the same sale price, if you want your bid to be accepted, bid either “14%” or “final price”.
From a tax perspective, it is very clear who should accept and who should not.
Finally, if you are considering accepting, a critical decision is what to do with the money. Are you reinvesting in Woolworths and buying on the ASX the shares you sold as part of the buyback? Do you do this before the buyback is complete (potentially taking some risk on the scale and the final market price), or do you wait until the outcome is announced and payment is received on October 21? If not, tell yourself Woolworths is expensive and invest that money in one of the other big consumer staples companies like Coles (COL) or Metcash (MTS). Or will you cut back on consumer staples and move to another sector, or do you just reduce your overall exposure to equities?