On April 1, Woolworths Group (WOW) announced it was undertaking a $1.7 billion off-market buyback that would complete by Friday May 24 2019. Offers to participate are open from Tuesday April 16 2019, until Friday May 24 2019. If you own WOW shares you should have recently received in the mail an offer to participate in the buy-back of WOW shares.
The offer is to buy the shares back off you at a discount to the market price, WOW is attempting to buyback the shares at the lowest possible price.
So why would a shareholder agree to sell at a lower price than you would get on the market? The incentive is that of the price received, $4.79 is capital component and the balance being a fully franked dividend. With the upcoming election bringing with it a possible threat to future benefit of franking credits, this might be a good opportunity for you.
The transaction may also create a capital loss which can be used to offset capital gains you may have, or think you may create, on the sale of other investments in this 2018/19 or future financial years.
For WOW shareholders on the lowest tax rate (or 0%) or who have a SMSF (either 15% or 0% tax rate) this could be worth considering. If you would like TAG Financials Services to work out the implications based on your current situation please call Leigh Jobling or Arden Shaw on 03 9886 0800. We can calculate the cost/benefit for you to assist you to make an informed decision.
If you sell your shares, but ultimately wanted to maintain your holding of WOW long term, you would need to re-buy them on market, which would incur a trading cost including brokerage.
Buy Back Discount
The Buy-Back will be conducted through a tender process. Eligible Shareholders who choose to participate can offer to sell some or all of their Shares to WOW:
- at a discount between 10% to 14% of the Market Price. The Market Price will be determined based on the average price across the 5 trading days prior to the close of trading on Friday 24th May 2019,
- at the Buy-Back Price, which is an election to sell your Shares at the price determined by WOW following completion of the tender process, or
- you can also nominate a Minimum Price below which you are not willing to sell any of your Shares.
- Do nothing and keep your WOW shares.
- Participate in the Buy-Back, with all or part of your holding – you need to take action to participate.
If you do participate and want to retain the same holding as now, once the buy back is complete, you will need to purchase the shares back on market at the prevailing market price.
Based on similar buy-backs recently we expect that the buy-back will be heavily oversubscribed and thus investors would be likely subject to potentially large scale-back. If you own less than 180 shares you must offer them ALL to be bought back by WOW. If you own more than 180 shares and the buy back is scaled back and you are left with less than 65 shares they will buy the remainder of those shares as well.
We have analysed the value of the buy-back for those with a 0% tax rate using the closing market price of Woolworths on April 1 of $31.08 – see Chart 1 below. Using $31.08 as a guide and assuming the maximum 14% discount applies, this equates to a $26.73 buy-back price. With the capital component being $4.79, the other $21.94 would represent a fully franked dividend, which would have a $9.40 franking credit attached. For a tax-exempt Australian investor, we estimate the buy-back at a 14% discount would be worth approximately $36.13 (disregarding the time value of money), representing about $5.05 per share benefit or 16% more than the market price of WOW on April 1 2019.
Using these assumptions, if you sold say 1000 shares in the buy-back as opposed to on market, that had an assumed cost base of $20.00 per share:
- 0% tax rate: $5.05 per share or $5,050 BETTER OFF.
Brokerage to buy-back the 1,000 shares would reduce the gain. The capital loss may not be useful if you have a super fund 100% in “pension mode” or have 0% personal tax rate.
- At 15% tax rate: $0.35 per share or $350 BETTER OFF.
You would also have a $10,860 capital loss available to offset against any current or future gains. Brokerage to buy-back the 1,000 shares would be an additional cost.
- At 39% tax rate: $7.17 per share or $7017 WORSE OFF.
You would have a $10,860 capital losses available to offset against any current or future gains. Brokerage to buy-back the 1000 shares would be an additional cost.
Naturally if you have more or less shares, or WOW scale back the buy-back more or less than expected, this would vary the outcome to you.
In all of the above examples if you chose to repurchase the shares, brokerage would be an additional cost. You would however have the benefit of a higher cost base carried forward.
If you choose to re-purchase, you may be better or worse off depending on movement in the share price.
- The 15% tax rate applies to a super fund which is NOT paying pensions to the members of the fund.
- The 0% tax rate applies to funds that ARE in “full pension phase” – subject to $1.6m pension caps.
- If gains are made on assets held less than 12 months and the capital losses are used, the tax benefit of the losses would be greater.
The price you receive is unknown at the time you complete your form.
If you are interested, believe there are other benefits to you or would like further information, please do not hesitate to contact us.
If you receive investment advice from another adviser (e.g. a stock broker), we encourage you to contact them.
If you wish to participate in the buy-back, you need to follow the instruction on the letter you received. You can submit your tender online, or download the tender form – to be completed and returned to the share registry by 5.00pm Friday 24th May 2019. We suggest you take the necessary action well in advance.
If TAG provide you with investment advice, we need to know your intentions by Friday 17th May 2019.
Disclaimer: This is general information only and is not advice to participate in the WOW buy-back, or to buy hold or sell any shares in WOW, as we have not taken your personal circumstances into account. Whether participating in the buy-back is appropriate for you will depend on your personal circumstances and we encourage you to seek advice before acting on this information. If TAG Financial Services are your investment advisers we welcome your call. If you use your own share broker, you should speak with them, or we would be pleased to discuss the mechanics of the buy-back with you. There are numerous different options for participating in the buy-back, however we have only selected one for illustrative purposes only.