Arborbridge wrote:My gut feeling is that the benefit to shareholders will be intangible, or sloped out over a long time so as to be un-noticeable.
That one off boost will vanish in a puff of smoke.
· A significant majority of net cash proceeds intended to be returned to shareholders
Nothing specific, and possibly (even
probably) not a special dividend
Having said that they'll be returning the majority of net cash proceeds to shareholders, it would be most unwise for the directors not to announce specific methods of returning them fairly soon (say within the next year at the very most) - they
will have major shareholders all over them if they announce a return of cash and then don't make good on it.
I suspect the fact that they haven't said
how they'll return the cash yet is basically a matter of confidentiality: while they were negotiating with Coca Cola, those negotiations would probably have been confidential. If so, that would have meant they couldn't tell
any shareholders what was going on without making them 'insiders', and fund managers and other major shareholders would generally not want to agree to that, since that would tie their hands as regards any trading in the shares (which
doesn't mean that they won't be intensely interested in less direct information and what they can work out from it about what deals might be going on, by the way - the problem is basically only about being directly told by the company). The net result of that is that the directors have only just started being able to say to shareholders "we've got these funds coming in and are going to return them to shareholders - how would you prefer we did that return?" - and they would also be unwise to decide how they're doing it without giving shareholders (especially major ones) a chance to express their views...
My own preference is generally the little-used tender offer: make the same offer to all shareholders to buy some or all of their shares back. That's because it treats all shareholders on an equal footing while giving them a choice as to whether they'd like to keep their money invested in the company or to have some or all of it returned for them to invest elsewhere. Market buybacks (probably the most common actual choice by companies, I think) fail to treat all shareholders on an equal footing in practice, being biased against small shareholders because e.g. selling 10% of a £1k holding to get one's share of the cash has very significant selling costs compared with the cash returned, while selling 10% of a £1m holding doesn't. And they may also be biased against shareholders who have less time and attention to devote to the job of doing the selling (though opinions may vary about whether devoting much time and attention to the selling actually gains anything significant, which is why I say "may"!).
Special dividends accompanied by share consolidations (probably the second most common method in practice) don't have those problems, and do indeed treat all shareholders on an equal footing in practice, but they result in all shareholders effectively selling a portion of their shareholdings - i.e. no choice for the shareholder about whether or not they keep their money invested in the company. They can also be decidedly annoying taxwise for those shareholders for whom Income Tax is a bigger concern than CGT, who are generally a very substantial number of shareholders (though by no means all of them).
And special dividends unaccompanied by share consolidations aren't really all that different from those accompanied by share consolidations: you simply end up with a lower share price and an unchanged number of shares, rather than a roughly-unchanged share price and a lower number of shares. I prefer them to special dividends accompanied by share consolidations because they only require the payment to be recorded as part of my income for the year, rather than adjustments to my CGT records as well. But I can certainly see the 'cosmetic' arguments for doing the consolidation, i.e. that leaving the share price roughly unchanged and the base level for the next year's dividend unchanged to avoid giving the impression of plummeting prices and dividend cuts is a good idea. (With regard to the dividend effects, if the special dividend is to return the proceeds of selling off part of the company, then the company has lost a corresponding part of its earnings. So it has less in the way of earnings with which to pay its dividends and so its total dividend payout will need reducing. The consolidation route does that by reducing the number of shares on which they have to be paid, while the no-consolidation route doesn't do that and so will probably require the dividend per share to be reduced, unless it's got enough leeway on paying dividends that it can still afford its total dividend payout from the reduced earnings. That's most likely when the fraction of the company sold off is quite small, which is one of the reasons why an accompanying share consolidation becomes more likely the bigger the special is.)
Tender offers do have disadvantages as well, the main ones of which that I'm aware of are that they're comparatively expensive, as they require individual decisions to be collected from all shareholders, and that they need to be pitched at the right level to ensure that they do return all the cash the company wants to, without significantly overpaying for the shares. (Some include an auction-like mechanism, asking shareholders at what price they'll accept within a limited range of possibilities, and paying the lowest price that gets enough acceptances to return the cash the company wants to. That alleviates the second problem, but makes the first a bit worse because of the more complex shareholder responses.) But on the whole, I feel they're the best option from my shareholder perspective.
One last point is that the present situation, where the directors haven't yet committed themselves to a particular mechanism for returning the cash, is probably the best time to make your views on the matter known to the company. Don't expect them to be given great weight, of course, but if you feel strongly about the matter, you might as well try... If you do, make it
very clear that you know the matter is still to be decided and that you're providing investor feedback about which decision you would prefer, not asking to be told what the decision is - investor relations people are just as prone as any other public relations people to trot out the stock answer to a common type of complaint if they can see any hint of it in what you say...
Gengulphus