Rio Tinto buy-back announcement

Buyback structure

Rio Tinto Limited (RIO) shareholders will be offered the opportunity to participate and tender all, some or none of their shares, with the tender closing on Friday 10 November.

The tender will be at a discount to the market price, ranging from 8% up to a discount of 14%.

The buy-back will comprise two components – a capital component of $9.44 and the balance as a fully franked dividend.

E.g. If the market price of RIO shares is $68.00 and the tender discount is 14%, then the buy-back price will be $58.48. This will comprise a capital component of $9.44 and a fully franked dividend of $49.04.

Note: Because the buy-back is relatively small (the $0.7bn represents only 2.9% of the issued capital of the ASX listed Rio Tinto Limited), RIO will accept tenders from those shareholders offering to sell at the lowest price (highest discount), and reject those offering to sell at a higher price (lower discount).

Rather than nominate a % discount, shareholders can also tender ‘final price’ (take whatever the market clears at). As a scale-back is expected, RIO has also announced some priority rules – to clear successful shareholders who are left with a residual parcel of 30 shares or less, and a guaranteed minimum allocation to successful tenderers of the first 75 shares.

The market price will be determined by calculating the volume weighted average price (VWAP) of trades on the ASX over the five trading days immediately before the closing day, i.e. 6 November to 10 November. The announcement of the buy-back price and any scale back will be made on Monday 13 November.

Criteria for accepting

This is unlikely to be attractive for clients in the higher marginal tax rate (34.5% or higher). Given that the majority part of the sales proceeds are treated as a franked dividend with a smaller part treated as the capital component, this makes it tax advantageous for shareholders who pay 0% tax or are under the threshold.

If clients are paying tax at 0% (such as an SMSF in pension or an individual with income under the tax free threshold), they should definitely consider. If clients are somewhere in between, such as an SMSF in accumulation, then depending on the tender discount and their ability to use any capital gains tax loss, it will generally make sense to accept.

Example calculation

Selling shares on market at $68.00, or selling shares in the buy-back. This example is from the perspective of an SMSF in accumulation (paying tax at 15%), and an SMSF in pension phase (paying tax at 0%).

Assumptions:

  • On-market buy-back – Sale price assumed $68. The deemed tax value is also $68.00 (this is determined by the ATO and won’t be available until after the buyback is completed).
  • Purchase price of RIO shares – $40.00 and held for more than a year
  • A tender discount of 14% (the maximum)
Rio Tinto - Chart 1

Click the image above to enlarge the chart.

Because this buy-back is relatively small and the franked dividend component is high, expect it to clear at 14%. So if anyone wants their tender to be accepted, it would make sense to either tender 14% or final price.

The buy-back price will be the same for all tenders – so if the tender is cleared at a discount of 10%, shareholders who nominate discounts of 11%, 12%, 13%, 14% will be successful and receive the price at a 10% discount.

Conclusion

In pension, at a discount of 14%, clients are $11.50 better off.

In accumulation, it makes sense to accept in most situations, more so if clients can utilise the capital loss.

Obviously, these calculations and assessment only consider this from a tax angle. RIO is expected to do well given the strong cyclical uptrend in commodities should see further capital growth in its share price. In addition, they will probably engage in more capital management programmes in the future, i.e. increasing dividends and declaring special dividends.

As always, all clients should be assessed on a case-by-case basis.

If you have any further questions, please do not hesitate to contact the BG Private Clients team on (03) 9810 0700 or at advice@bgprivateclients.com.au.

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This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.

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