On 1st April 2019, Woolworths Group Limited (ASX: WOW), a supermarket brand of Australia announced that it would conduct $1.7 billion off-market buy-back to return shareholders’ funds using the proceeds from the sale of its petrol business to EG Group.
The buy-back would be carried out through an off-market tender process. The eligible shareholders of Australia and New Zealand who decide to participate can sell shares at a discount of between 10% and 14% below the volume weighted average price over the five days before the May 24 closing date. The buyback price would be announced on the 27th of May.
Woolworths' $1.7 billion off-market share buyback is anticipated to be highly oversubscribed by pensioners and retirement funds stalking franking credits before any proposed changes to the law enter into force.
As the program seems to be highly tax-effective, there could be an overwhelming demand from investors. Due to which, only a small number of shares tendered would be bought back. So, the analysts warn that buyback could be severely hit.
The shares are most likely to be bought back at a 14% discount owing to substantial demand. The buyback will consist of $4.79 capital component and the remainder being the fully franked dividend.
Woolworths closed at a market price of $31.08 on the day of buyback announcement. As per the analysis performed by an investment firm, if the buyback price being 14% discount on $31.08, i.e. $26.73, the dividend component would be $21.94. There would be $9.40 franking credits attached to the dividend component.
On the other hand, for tax-exempt investors, the buyback price would be 16 per cent more than the company’s share price on the day of buyback announcement, i.e. around $36.13.
As per reports, if Labor wins the May election, it will ban the repayments of excess franking credits to non-taxpayers, except pensioners.
As per Citigroup estimations, 50% - 60% of Woolworths' share register would be at an advantage from the buyback. This is because Australian retail investors retain about 40% of the shares while Australian superannuation funds retain about 35% of the shares. The buyback would be worth $33.62 for retirement funds and investors on a 15% tax rate, according to their computations. This would represent an 8.2% of the after-tax return.
On the other hand, for investors on a 25% tax rate and 35% tax rate, the return would be -0.1 per cent and -6.7 per cent respectively.
Woolworths may buyback around 4.9% of shares on issue, i.e. between 61 million and 64 million shares, predicts one more banking major. So, the company’s index weight will reduce by 10 and 19 basis points.
There has been a 5% rise in the value of Woolworths shares post the buyback announcement. The current market price of the company’s share is AUD 31.990 (as on 26th April 2019) which is the highest level recorded since Feb 2015. This is due to the rise in demand for shares ahead of the buyback and the increase in food prices.
It is anticipated that the buyback will improve earnings per share and return on shareholders’ funds.
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