Author Topic: WOW buy back  (Read 448 times)

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Offline Jennifer S

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WOW buy back
« on: 03/04/2019, 05:43:35 PM »
Hi again
I'm wondering how buy backs work and affect share price. Currently WOW are planning a buy back the process of which will begin soon. I guess this will probably affect the share price and therefore signals. Does anyone foresee how the price may be affected?? thanks

Offline Campbell Sinclair

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Re: WOW buy back
« Reply #1 on: 04/04/2019, 11:39:35 AM »
Hi Jennifer,

The WOW share buyback is notably a, off-market, purchase of shares from their shareholders. There is a tender process described at length in a booklet available on the ASX website dated 01/04/2019: https://www.asx.com.au/asx/share-price-research/company/WOW

Essentially the final price offered in the buy back is not set and will not be known until the tender process is complete which is pencilled in to be 27th May 2019. Otherwise it will be based on this formula (page 13 / 63) if someone did not wish to wait that long to take up the offer:

Quote from: Woolworths Booklet
A = B x (1 - C)

Where:

A is the Buy-Back Price (rounded to the nearest cent (and for the avoidance of doubt, rounded up in the case of a half a cent) or rounded up as appropriate, if rounding to the nearest cent would involve a discount of greater than 14% to the Market Price(subscript: 1));

B is the Market Price; and

C is the Final Buy-Back Discount.

For example, if the Market Price is A$30.00 and the Final Buy-Back Discount is 14%, the Buy-Back Price would be A$25.802 (i.e. A$30.00 x (1 - 0.14))

Then these shares are taken off the market altogether, at a price which calculated to be below the fluctuating day to day market price.

So definitely this is another variable that affects the share price as selling at a guaranteed loss so quickly may entice someone somewhere - it is impossible to know with certainty. All we can do is react to the price action the market offers us, so this buyback to a mechanical investor only really joins the known variables that exist alongside unknown variables which drive market movements.

Offline Jennifer S

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Re: WOW buy back
« Reply #2 on: 04/04/2019, 03:01:16 PM »
That's what I don't understand. Selling at a guaranteed loss (unless it's only equal to the loss of brokerage + tax on Cap Gain), the discount if it benefits the company and therefore remaining share holders, Why would anyone in their right mind sell at less than the market price ??

Offline Paul M

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Re: WOW buy back
« Reply #3 on: 09/04/2019, 05:37:26 PM »
Hi Jennifer,

The reason for selling at less than the market price is that Franking Credits also need to be counted in the overall return to the seller.
So, if WOW are at $30 on-market (make the numbers easy!) with a discount of 14% off the market price, then it would be sold for $25.80 in the offer (discount is $4.20). But, for tax purposes, the sale price is comprised of a capital component of $4.79, with any excess above that treated as a fully franked dividend. Using the above amounts, this would mean that the dividend component in the sale price would be about $21. The franking credit amount on this would be about $6.30 (0.3 x $21). So the overall return to the seller is about $32.10 ($25.80 + $6.30). This is much better than the on-market return of $30 (but the seller would have to wait until tax time to get the FC part of the sale).
Pages 11 and 16 of the Offer Document gives further information about this.
Hope that helps

Offline Jennifer S

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Re: WOW buy back
« Reply #4 on: 09/04/2019, 06:18:16 PM »
It does help thanks Paul. Makes more sense so if we had a crystal ball to know what would happen at market after the few day average price .... Oh for the crystal..