Tesco - RNS re Conditions satisfied for sale of Asia business posted on Company News Board.

[scrumpyjack]

I do not hold Tesco but I clearly see what is happening. The positive side of course is that at least if you do nothing your share of the remaining economic value remains the same. As scrumpyjack indicates though, it ought really to be organised as a capital return which is what it is and not a special dividend. Would it fundamentally make any difference to the tax liability though? Only if a capital return was to be taxed under the Capital Gains tax regime I would have thought. Was that not disallowed?

Dod

No it wasn't disallowed. It was only made ineffective where the shareholder had a choice between dividend and capital return. If the shareholder is given a capital return without the choice of having it as dividend, it is treated as a partial disposal of the shareholding subject to CGT if there is a taxable gain.
That is what Tesco should have done with this.

[absolutezero]

Does the share consolidation negate the dividend via some shady financial engineering?

This is a game they play a lot - here's some cash (oh and you now don't have as many shares and the value has fallen so you are no better off).
Is it one of those?

I don't hold Tesco so I'm not digging into the figures to work it out.

No. And there isn't any "shady financial engineering" at least not on any definition I could ascribe it to. Nor am I aware of any game, or the frequency on which you believe it is played. Perhaps you can explain who "they" are, and give examples of the kind of practice you refer to as that would be useful?

As I just said.

Cynicism (like absolutezero's) seems to be a very common attribute and not a very pleasant or constructive one either.

Dod

People seemed to be getting very excited about the special dividend.
I asked if they would be any better off.
The answer appears to be no.
People then pick apart the language.
I get accused of being cynical and negative. I'm a good fit on this board then.

[dealtn]

No. And there isn't any "shady financial engineering" at least not on any definition I could ascribe it to. Nor am I aware of any game, or the frequency on which you believe it is played. Perhaps you can explain who "they" are, and give examples of the kind of practice you refer to as that would be useful?

As I just said.

Cynicism (like absolutezero's) seems to be a very common attribute and not a very pleasant or constructive one either.

Dod

People seemed to be getting very excited about the special dividend.
I asked if they would be any better off.
The answer appears to be no.
People then pick apart the language.
I get accused of being cynical and negative. I'm a good fit on this board then.

So that's an admission you don't have any examples of any such practice, despite it being a game someone(?) plays a lot, then? At least we now know.

[pyad]

So that's an admission you don't have any examples of any such practice, despite it being a game someone(?) plays a lot, then? At least we now know.

There are numerous examples of big companies giving capital returns accompanied by a share consolidation over recent years. In fact it is far rarer to see such capital returns without an accompanying consolidation. The effect on the shareholder is a compulsory sale of part of their holding. It is a matter of personal opinion whether the individual finds that to be a good, bad or indifferent procedure and will probably vary from one company to another for the same shareholder.

The real reason why it is commonplace to have a consolidation with a capital return is to maintain approximately the same share price immediately after it goes ex the payout as it was before so as to avoid the ignominy of the large price fall that would otherwise result from the payout. In other words it's a bit of window dressing to give the impression of no ostensible effect on the share price, though of course the holder has fewer shares.

However I wouldn't call the practice "shady" with its undertones of illegality and dodgy dealings. It's all open and clear so there's nothing actually wrong with it, even if the investor doesn't like what's happening. In some cases the holder may even be glad to get rid of part of their holding at no cost.

[absolutezero]

As I just said.

Cynicism (like absolutezero's) seems to be a very common attribute and not a very pleasant or constructive one either.

Dod

People seemed to be getting very excited about the special dividend.
I asked if they would be any better off.
The answer appears to be no.
People then pick apart the language.
I get accused of being cynical and negative. I'm a good fit on this board then.

So that's an admission you don't have any examples of any such practice, despite it being a game someone(?) plays a lot, then? At least we now know.

Read it like that if you want, sweetheart.

[idpickering]

There are numerous examples of big companies giving capital returns accompanied by a share consolidation over recent years. In fact it is far rarer to see such capital returns without an accompanying consolidation. The effect on the shareholder is a compulsory sale of part of their holding. It is a matter of personal opinion whether the individual finds that to be a good, bad or indifferent procedure and will probably vary from one company to another for the same shareholder.

The real reason why it is commonplace to have a consolidation with a capital return is to maintain approximately the same share price immediately after it goes ex the payout as it was before so as to avoid the ignominy of the large price fall that would otherwise result from the payout. In other words it's a bit of window dressing to give the impression of no ostensible effect on the share price, though of course the holder has fewer shares.

However I wouldn't call the practice "shady" with its undertones of illegality and dodgy dealings. It's all open and clear so there's nothing actually wrong with it, even if the investor doesn't like what's happening. In some cases the holder may even be glad to get rid of part of their holding at no cost.

Thanks for your level-headed post Stephen, a rarity around here of late imho . Most interesting. I hold TSCO, and am not remotely bothered about this event either way. Don't be a stranger PYAD.

Ian.

[Arborbridge]

It doesn't seem at all "shady" in the usual sense. Given that there will be an alternation in the company structure of one sort or another, they are only a couple of ways of doing it - both of which are transparent and have been explained by our knowledgeable posters.

Not that many of us like the process as it always seems inconvenient and slightly disturbing of the grey matter

More to the point is whether it's a good idea to sell off a bit of the company. That's a management choice, so let's just let them get on with it. If one wants to be cynical ( and a little gentle cynicism can be a good thing) it would in my view be around the way managements in general first think something is a brilliant way to expand, and then a few years later decide they want to retrench.
It could be incompetence, hubris, or it could be just the way capitalism causes companies to ebb and flow.

Either, there's not much we can do about it, (other than sell) so it really isn't worth getting too exercised over it.

Arb.

[idpickering]

More to the point is whether it's a good idea to sell off a bit of the company. That's a management choice, so let's just let them get on with it. If one wants to be cynical ( and a little gentle cynicism can be a good thing) it would in my view be around the way managements in general first think something is a brilliant way to expand, and then a few years later decide they want to retrench.
It could be incompetence, hubris, or it could be just the way capitalism causes companies to ebb and flow.

Either, there's not much we can do about it, (other than sell) so it really isn't worth getting too exercised over it.

Arb.

Spot on Arb. I couldn't agree more. Have a rec. Btw, I take it you meant "excited" rather than "exercised"?

Ian.

[Arborbridge]

More to the point is whether it's a good idea to sell off a bit of the company. That's a management choice, so let's just let them get on with it. If one wants to be cynical ( and a little gentle cynicism can be a good thing) it would in my view be around the way managements in general first think something is a brilliant way to expand, and then a few years later decide they want to retrench.
It could be incompetence, hubris, or it could be just the way capitalism causes companies to ebb and flow.

Either, there's not much we can do about it, (other than sell) so it really isn't worth getting too exercised over it.

Arb.

Spot on Arb. I couldn't agree more. Have a rec. Btw, I take it you meant "excited" rather than "exercised"?

Ian.

Either would do

[dealtn]

If one wants to be cynical ( and a little gentle cynicism can be a good thing) it would in my view be around the way managements in general first think something is a brilliant way to expand, and then a few years later decide they want to retrench.
It could be incompetence, hubris, or it could be just the way capitalism causes companies to ebb and flow.

To be fair to management, in this case at least, Tesco have been involved in Thailand since 1998, and Malaysia since 2002. It was a different set of Directors that took them in, to the ones deciding to divest and come out, and that's a considerable period of time between the two decisions.

Were it the same management, over a shorter period, I think there would be relevance in questioning their judgement maybe, but that seems absent here.

[Gengulphus]

I'm coming to this very late, but the practical way to treat a special dividend or other payout by a company that is accompanied by a share consolidation is fairly simple if you hold the shares in an ISA, SIPP or other tax shelter:

* You're up by an amount of cash equal to the special dividend / other payout. (Sometimes there's a bit of extra cash to be added to that in the form of a fractional entitlement payment from the consolidation.)

* You're down by a number of shares due to the share consolidation, and your expectations of future income from your holding are down correspondingly.

* Being up by some cash, down by some shares and your expectations of future income being down correspondingly is exactly what would happen if you sold some shares - so effectively the company has forcibly bought some of your shares off you.

* That effective buyback by the company is at a price equal to the amount of cash you're up by divided by the number of shares you're down by. This will normally be close to the market price of the shares - that's basically a consequence of the consolidation ratio being chosen to avoid the ignominy of a large price fall that pyad refers to above.

So basically the question to ask oneself when deciding what to do about such a corporate action is "am I OK with this effective forced sale of part of my holding?". If you are OK with it, then treat the special dividend as you would normally treat sale proceeds, including effective sale proceeds (note that even fully non-tinkering HYPs need a method of treating such sale proceeds, because of the possibility of cash takeovers). If you're not OK with it, use the special dividend to buy a top-up of the holding back to roughly its previous level, and you can reasonably feel a bit annoyed with the company for the trading costs it has effectively imposed on you and for the exposure for share price fluctuations between the effective sale price you got and the price at which you buy the top-up. But keep that annoyance in perspective: it's normally of the order of at most a few months' worth of income on the holding, so not enormous, and special dividends plus share consolidations are normally pretty rare for a company (though Intercontinental Hotels is an exception to that!).

If you hold the shares in a non-tax-sheltered account or as certificates, I would treat the basic picture as the same, but with potentially considerably more annoyance because tax imposes much-larger-than-usual 'trading costs' on the forced sale and possibly some complicated decisions about how you want to be taxed - it might in some circumstances be preferable to take the CGT consequences of selling before the ex date for the special dividend + share consolidation and buying back afterwards rather than the Income Tax consequences of receiving the special dividend. That will be highly dependent on individual circumstances, though, and so the only real suggestion I can make about it is to work out what the tax consequences are for you each way and choose the one with the best outcome.

Gengulphus

[SoBo65]

I cannot work out why the negativity of the market on Tesco, allowing for the share consolidation and divi 40p due tomorrow the share price has taken a big hit, seems to me they are well placed given current circumstances and the Asia sale has strengthened the balance sheet, underlying yield seems reasonable - anything I am missing please?

[tjh290633]

I cannot work out why the negativity of the market on Tesco, allowing for the share consolidation and divi 40p due tomorrow the share price has taken a big hit, seems to me they are well placed given current circumstances and the Asia sale has strengthened the balance sheet, underlying yield seems reasonable - anything I am missing please?

I would suggest that you are missing a good source of information. The special dividend is 50.93p, the consolidation took place on the 15th, effectively the 11th when it went XD, and the share price is about 13p below that on the 10th, but the market is down since then.

It looks like you will be able to by back your shares on Monday at a lower price than when they consolidated. What's not to like?

TJH

[dealtn]

I cannot work out why the negativity of the market on Tesco, allowing for the share consolidation and divi 40p due tomorrow the share price has taken a big hit, seems to me they are well placed given current circumstances and the Asia sale has strengthened the balance sheet, underlying yield seems reasonable - anything I am missing please?

A strengthened balance Sheet at the cost of selling off the more profitable, and growing, parts of the Group leaving the residual business as your sole investment might not be optimal strategy.