Companies clean up their capital

By Peter V O'Brien

Friday 9th July 2004

Carter Holt Harvey's proposed return of about $480 million of capital to shareholders through a 1:4 share cancellation is the second-biggest such scheme devised under the 1993 Companies Act's capital redemption provisions.

The act allowed companies to buy their own shares (commonly referred to as "buybacks,") redeem shares, cancel them and provide financial assistance for the purchase of their shares.

A $525 million capital return to shareholders in NGC Holdings, approved at the company's annual meeting in October, was the biggest under the act's provisions. It involved the cancellation of three shares for every seven at a payment of $1.58 for each cancelled share. The NGC scheme was designed to give the company a more efficient capital structure.

Chairman Greg Martin told the meeting it was highly inefficient for a company like NGC to have no debt, "never mind surplus cash."

Carter Holt directors decided to undertake a capital repayment of about half the $1 billion received from the sale of the tissue business. That proposed capital return arose from a substantial one-off cash inflow, whereas the NGC situation was the culmination of several asset sales and a general repositioning of the business. Both proposals reflected a desire for efficient capital management.

A similar desire led to Independent Newspapers' $340 million capital return through the cancellation of one in every six shares and payment of $4.66 for each cancelled share. The INL payment was made in April.

Companies benefit from a capital return because they get more efficient funds management and financial flexibility. Benefits to shareholders are less certain or tangible.

Shareholders should benefit from the companies' improved capital efficiency but that is intangible and could take time.

Cash in hand would be an obvious tangible benefit, provided there was also gain in value of the remaining shares. The latter can be difficult to assess, because the market's assessment of a stock's value combines many factors, of which capital management efficiency is only one.

For example, NGC shares sold at $1.81 immediately before the capital return but were $2.03 immediately after. A theoretical price would have been $1.73 after adjusting for a 3:7 cancellation and repayment of $1.58 for each cancelled share.

They sold at $2.86 on July 1.

The effective gain was 27.7% after allowing for cancellations and the cash repayment but ignoring any alternative return on the latter.

It would be impossible to calculate how much of the gain, if any, related to the technicalities of the capital return and how much to a combination of overall market improvement and investors' assessment of NGC's individual prospects.

INL's price, by contrast, was less last Friday than at the repayment record date after including the capital return. The former newspaper company was effectively a "one holding" stock with its investment in Sky Network Television.

Meat processor Affco Holdings was the latest company to announce a capital return. It would be $20 million through a pro rata cancellation of shares under a High Court-approved scheme of arrangement and subject to shareholder approval. Affco's announcement said the capital return followed "significant capital injections by shareholders in the past two years, in addition to realisation of surplus assets and investments which have been substantial."

The company's shareholders should welcome the capital return.

Cash issues are another form of efficient capital management. They often benefit shareholders through ex issue share prices tending to revert to cum issue soon after going ex. Recent and current issues came from Blis Technologies (1:2 at 10¢, price now 15¢), Capital Properties (1:3 at 75¢, now 95¢) Certified Organics, (proposed 1:7 at 7.5¢,cum rights price 10.5¢), Kirkcaldie & Stains (1:3 at $2, price now $2.45).

Companies have also made or are making convertible capital notes issues, which have the potential for substantial benefits to investors. They included AMP NZ Office Trust and the interesting offer from unlisted winemaker Delegat's.

The latter sought $35 million in 9.7% 2007 notes (redeemable, renewal or convertible at the company's option) and had them grabbed so quickly there was no public pool.

Share splits are investors' best form of "capital management," to take liberties with the term. There is no logical reason that a price should rise after a share split, apart from sudden revelations of improved profit prospects.

Fisher & Paykel Appliances Holdings' shares were split 4:1 in November at $14.85, for a theoretical ex split $3.71. They were $4.53 last week.

Trustpower shares were $7.30 before a 2:1 split in April ($3.65 ex split) and were $4.70 last week.

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