Companies use cash issues, distributions and buybacks for financial efficiency

By Peter V O'Brien

Friday 3rd May 2002

Efficient equity and debt management involves more than just asking a company's shareholders and other sections of the investment markets for additional money through issues of new securities.

Companies can be overcapitalised or have unjustifiably low debt levels, situations that may make financial reorganisation desirable.

The 1993 Companies Act allowed companies to buy their own shares - the "buyback" procedure - redeem shares, cancel them and provide financial assistance for the purchase of their shares.

A survey in The National Business Review's NBR Personal Investor on April 5 considered briefly recent examples of listed company activity in relation to financial management and detailed Ports of Auckland's proposal to return $132 million of equity to shareholders and replace it with debt.

Cash issues, special distributions, share buybacks and the use of takeovers as a form of financial efficiency are now discussed in more detail.

It should be noted there is a distinction between a buyback and a one-off cancellation/
redemption of shares.

Buybacks are conducted over a defined period at a price related to the market level on particular trading days.

Recent examples of buybacks noted on April 5 included Dairy Brands, Eventures, Evergreen Forests, Ryman Healthcare and Michael Hill International.

Utility investor Utilico International said on April 8 it intended acquiring equities in the company. The acquisition would occur within the 12-month period commencing April 12 and the maximum number of ordinary shares to be acquired would be 294,878.

Utilico redeemed seven out of 10 existing shares in December at 50c a share.

The company received about $8.7 million from CSX World Terminals Brisbane Pty after the sale of the latter's business.

There were 5,897,532 shares on issue after the December redemption and the 294,878 involved in the buyback is 1:20 (5%), plus - for some reason - one. Utilico's report for the six months ended December 31 showed shareholders' equity of 5.94 million, investments worth $5.75 million and cash of $278,000.

That position justified the earlier return of capital and the current buyback.

Raising new equity through cash issues has been a considerable area of activity since late last year, with 13 companies using the procedure, including Australia group GRD which has New Zealand shareholders and gold mining interests at Macraes Flat, Central Otago and near Reefton on the West Coast.

The reasons for local cash issues of equities were as varied as the companies' activities.

Healthcare provider Eldercare New Zealand raised $10.3 million in new equity late last year through a cash issue and share placement.

The company said the capital injections had further strengthened its financial position by increasing the equity in the business, in readiness for its next round of acquisitions.

They had also enabled it to reduce overall group debt to less than $29 million.

Total debt was shown as $41.49 million in the annual report for the year May 2001.

Food processor Mr Chips Holdings completed a cash issue last week in the ratio of three new shares for every 10 held at $1 a share.

The issue was part of an equity and debt mix to finance a new building and french fry manufacturing line on its land adjacent to the existing East Tamaki factory.

An issue from technology company CommSoft Group was said to fund working capital requirements and help to drive higher sales through its improved distribution channels.

Other companies had particular reasons for their cash issues but the examples given show funds may be used for expansion, financing acquisitions, and/or working capital purposes and/or maintaining appropriate debt-to-equity ratios.

Takeovers can be a form of efficient capital management if the bidding company perceives the issue of shares in itself, cash payments or a mixture of both for a new business, will allow it to expand and improve profitability. Many takeovers do not achieve those objects, particularly if the bidder has paid too much for the acquisition or lacks experience in and knowledge of the target's industry.

That is beside the point. The bidder's perception is what matters. A takeover can sometimes be a way for the bidder to alleviate pressures on its financial structure and lower debt.

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