Stagecoach Return of Cash

Fairwinds

Anyone got stagecoach shares?

Am I right in thinking that the current offer to return cash to shareholders is a bad deal based on current share price?

Seems as if cash will be returned based on £231.9, and current price is £251 ish( after falling 8 today). New shares are issued at 4 for 5.

Does seem like you have an option just to keep the shares.

Am i reading this right?

Sceptic001

Isn't it simply a proposal to return 47 pence per share to shareholders?
http://www.reuters.com/article/2011/08/19/stagecoach-idUSL5E7JJ06Q20110819

If you own shares on a certain date you will receive 47p for each share you own. The share price on any given day is irrelevant. It's not a rights issue. I don't really understand what you are asking.

Ark_Welder

As Sceptic001 says, the 47p is a payment to shareholders. It can be take as either a dividend or as a capital distribution (issued as D shares, which can then be sold like other shares.

And even more fun and games, there is to be a share consolidation too!

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=10953701

Fairwinds

I wish you were correct but sadly I don't think so from your link

Terms of the Return of Cash

The key terms of the proposed Return of Cash are:

· Existing Ordinary Shares to be sub-divided into Intermediate Ordinary Shares and D Shares at a ratio of 1 Intermediate Ordinary Share and 1 D Share for each Existing Ordinary Share held at the Record Time (expected to be 5.30 p.m. on 7 October 2011)
· Intermediate Ordinary Shares to be consolidated into New Ordinary Shares at a ratio of 4 New Ordinary Shares for every 5 Intermediate Ordinary Shares


The example in the literature also shows before and after of 1000 shares becoming 800 + £470.


200 shares at todays prices would be worth more than that.

Ark_Welder

GordonD wrote: »

· Intermediate Ordinary Shares to be consolidated into New Ordinary Shares at a ratio of 4 New Ordinary Shares for every 5 Intermediate Ordinary Shares


The example in the literature also shows before and after of 1000 shares becoming 800 + £470.


200 shares at todays prices would be worth more than that.

When there is a share consolidation the price of the new shares increase to reflect the change. e.g:

1000 shares at 250p.
Deduct dividend of 47p, shares are 203p

Value of shares held is 1000 x 203p = £2030.00

consolidation 4 for 5: 1000 shares become 800, price of shares change to 253.75p (being: 203 x 5 / 4)

Value of consolidated shares held is 800 x 253.57p = £2030.00

The 47p dividend can either be taken as a cash distribution, which will fall under income tax regulations; or it can be taken as a capital distribution, namely D shares (which will have a price of 47p each) and these can be sold, which will fall under CGT regulations.

Fairwinds

Yes I agree, with the exception that the companies balance sheet is now lighter to the tune of £350m ( or what ever the number is) that they now don't have in the bank and have returned to investors -

In your example you have managed to give away £350m and replace it ( keep the same valuation of the company) all in one action.

Sceptic001

I have looked at Stagecoach's statement and my understanding of the proposal (which is subject to approval at a general meeting on 7th October is as follows:

The 47pence cash per share held at 5.30pm on 7th October (the Record Time) will be paid to shareholders on 21st October. Shareholders can opt to receive this in the form of either a capital payment or an income payment (presumably the choice will depend on the shareholder's individual tax situation - perhaps a tax expert can explain the difference? Also am I right in thinking that the share price will behave like when it goes ex-div and will reduce on 7th Oct by 47p to reflect this payment?)

Also Stagecoach is restructuring its capital by replacing five of its current shares with four new shares. So if you currently own 1000 shares, you will instead own 800 of the new ordinary shares. Since the capital value of the company will be unchanged, I assume the value of the new shares will increase proportionately. It is like a scrip issue in reverse.

Ark_Welder

GordonD wrote: »

Yes I agree, with the exception that the companies balance sheet is now lighter to the tune of £350m ( or what ever the number is) that they now don't have in the bank and have returned to investors -

In your example you have managed to give away £350m and replace it ( keep the same valuation of the company) all in one action.

Show the maths that demonstrates your thinking.

Fairwinds

I'll try

Market capitalisation is £1806m

So at 250p per share 722.4 million shares in issue.

If all the assets of the company reduce, previously valued at £1806m suddenly by £350M the value of the company will fall - now £1456m

Also 20% of shares are bought back so come out of circulation

so now shares in circulation are 577.9m

1456/578 = 2.52

The value has increased slightly because the company has managed to buy something worth 50p ( 1/5 of 250) for 47p.

That's my thinking - yesterday the shares were worth 260

Still doesn't seem like a win situation

Sceptic001

You are conflating two completely separate transactions.

The return of £340 million cash by way of a 47p per share payment will obviously reduce the value of the company by £340 million. This will be reflected by a 47p fall in the share price in the same way that share prices fall when companies go ex-dividend.

The share consolidation (NB. not a share buy-back) does not affect the total value of the company. It simply reduces the number of issued shares, with a corresponding rise in the value of each share.

Presumably they could have achieved a similar outcome by simply buying back one in five shares. Maybe there is a financial expert on this board who can explain why Stagecoach decided on this more complex arrangement?

Ark_Welder

Sceptic001 wrote: »

You are conflating two completely separate transactions.

The return of £340 million cash by way of a 47p per share payment will obviously reduce the value of the company by £340 million. This will be reflected by a 47p fall in the share price in the same way that share prices fall when companies go ex-dividend.

The share consolidation (NB. not a share buy-back) does not affect the total value of the company. It simply reduces the number of issued shares, with a corresponding rise in the value of each share.

Presumably they could have achieved a similar outcome by simply buying back one in five shares. Maybe there is a financial expert on this board who can explain why Stagecoach decided on this more complex arrangement?

Not an expert, but...

A reason for returning cash to shareholders by this method rather than a buyback is that only those shareholders that manage to sell will receive an immediate cash return, and those that remain might benefit in the longer term due to a higher earnings per share. A share buyback might be done on a pro rata basis, but this would fall under CGT regulations for the investor. This might benefit a higher-rate payer that has not used up their CGT allowance for the year because they would not have to pay the extra tax due on a dividend distribution. But the reverse could be true of a basic/non tax payer who may have used, or be close to using, up their CGT allowance for the year but who will not be moved into a higher tax band by a dividend distribution.

I was in a situation some years ago where a capital distribution was made to shareholders by way of a B-share issue. But as these could (would?) not be held in my ISA the platform provider immediately sold them, thus I incurred a transaction charge. Taking the distribution as a dividend instead would not have incurred charges. Can't remember the exact details now, i.e. whether there was a choice as to how to take the cash.


And to reinforce your point about this being a share consolidation (which is the opposite of a share split) and not a buyback, the 47p distribution is being paid to shareholders and not being used to buy back shares. After the distribution cost has been deducted from the share price, a reorganisation of the share base is taking place where 4 new shares will replace 5 existing ones with the new shares being at a higher price than the old so that investors' holdings retain the same value (after they have received the distribution).