On Monday 23rd November, Ampol (formally known as Caltex) announced a $300m off-market buy-back after finalising its property transaction where it raised $635m after tax.
Off-market buy-backs are a tax effective mechanism for returning franking credits to shareholders who most value them. The buy-back will have a $2.01 capital component, with the balance being a fully franked dividend. The buy-back will be based on a tender, with investors tendering to sell shares at a discount of between 10% to 14% below market price. Shareholders who don’t participate will still benefit from the buy-back, to the extent that shares are effectively bought back at a cash discount to market price. This compares with on-market buybacks, where companies buy-back stock at market price.
We have analysed the value of the buy-back for tax-exempt investors such as charities, foundations, pension phase superannuation and individuals below the income tax threshold using the market price of Ampol at the time of writing on November 24 of $30.00 – see Chart 1 below. Using $30.00 as a guide (the actual price used for the buy-back will be the volume weighted average price of Ampol shares in the five trading days up to and including January 22, 2021) the maximum 14% discount would equate to a $25.80 buy-back price. With the capital component being $2.01, the other $23.79 would represent a fully franked dividend, which would have a $10.20 franking credit attached. For a tax-exempt Australian investor, we estimate the buy-back at a 14% discount would be worth approximately $36.00 (disregarding the time value of money), representing about $6.00 or 20% more than the market price of Ampol today, but please note that the buy-back is expected to be completed on January 25, 2021, based on volume weighted prices from the previous week.
The value of the buy-back for other investors will depend on the tax situation of each investor. We would expect the buy-back to be of some value for 15% tax rate Australian investors, but significantly less that the 20% number for tax-exempt investors. The precise value will be determined by investor circumstances, the deemed capital value that the ATO will issue after the close of the buyback and the final buy-back price relative to the closing market price.
Given that we estimate the buy-back is valuable for both tax-exempt and 15% tax rate Australian investors at the maximum discount rate, and given the moderate size of the buy-back relative to Ampol’s current market capitalisation (approximately 4%), we would expect the final buy-back price to be set at the maximum 14% discount to market price. We would also expect, based on similar buy-backs, that the buy-back will be oversubscribed and thus investors would be likely subject to potentially large scale-back (other than small investors who would be left with less than 75 shares as a result of the scale-back) – that is only a small portion of shares tendered would be successfully bought back in the buy-back. So whilst we expect the buy-back to be quite valuable for tax-exempt Australian investors for every share successfully tendered, any scale-back will reduce the overall value of the buy-back at the portfolio level.
Plato expects to tender all Ampol shares owned by the Plato Australian Shares Income Fund into the buy-back as this fund is managed from the perspective of tax-exempt Australian investors. This means that investors in both the Plato Australian Shares Income Fund and Plato Income Maximiser Limited (PL8.AX) should benefit from the Ampol buy-back. We believe opportunities such as this Ampol buy-back highlight the importance of tax-exempt investors like pension phase superannuants having their investments managed from their tax perspective.
Please note that this analysis depends very much on the particular tax status of the investor. We would suggest individual investors should seek professional tax advice based on their individual tax circumstances.
This document is prepared by Plato Investment Management Limited ABN 77 120 730 136, AFSL 504616 (‘Plato’). Pinnacle Funds Services Limited ABN 29 082 494 362, AFSL 238371 (‘PFSL’) is the product issuer of the Plato Australian Shares Income Fund (‘the Fund’). The Product Disclosure Statement (‘PDS’) of the Fund is available at https://plato.com.au/. Any potential investor should consider the relevant PDS before deciding whether to acquire, or continue to hold units in, a fund.
Plato Investment Management Limited (ABN 77 120 730 136, AFSL 504616) (‘Plato’) is the investment manager of Plato Income Maximiser Limited ACN 616 746 215 (‘PL8’ or the ‘Company’). PL8 is the issuer of the shares in the Company under the Offer Document. Any offer or sale of securities are made pursuant to definitive documentation, which describes the terms of the offer (‘Offer Document’) available at https://plato.com.au/lic-overview/ This communication is not, and does not constitute, an offer to sell or the solicitation, invitation or recommendation to purchase any securities and neither this communication nor anything contained in it forms the basis of any contract or commitment. Prospective investors should consider the Offer Document in deciding whether to acquire securities under the offer. Prospective investors who want to acquire under the offer will need to complete an application form that is in or accompanies the Offer Document. The Offer Document is an important document that should be read in its entirety before deciding whether to participate in the offer. Prospective investors should rely only on information in the Offer Document and any supplementary or replacement document. Prospective investors should contact their professional advisers with any queries after reading the Offer Document.
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