Many of our clients own Telstra shares and by now would have received the offer documents. The Telstra buyback is typical of others that have happened in the past to other companies whereby those shareholders interested tender to Telstra to sell their shares back to Telstra at a price discounted to the actual value of the shares.
The discount range you tender is between 6 to 14%. The value you are paid is then broken down to a capital component of $1.78 with the balance being a fully franked dividend. Example: Telstra’s price is $5.00 for example. You tender to sell back at 10% and are successful. Therefore you will receive $450 being $1.78 capital plus $2.72 fully franked dividend. Should you or shouldn’t you? It is likely that the successful tenders will be at the top end of the range at 14%. The two factors that then determine if it is worthwhile are:
- Your marginal tax rate. If you own the shares in your super fund that is not paying any tax because you are in pension phase, then it is worthwhile. A super fund paying 15% rate will get a minor benefit.
- Your initial cost base. All shareholders would have paid more than $1.78 for each share and as such any successful applicant will incur capital losses which may be useful if planning to incur a capital gain this year.
It also needs to be noted that if the tender is oversubscribed then the buyback will be pro-rated. The minimum buyback should be 880 shares per shareholder. On top of this, any successful shareholder who holds less than 1,230 shares will have all their shares bought back.
This article appeared in our September 2016 newsletter.