As widely assumed, Woolworths is returning AUD 1.7 billion in funds to shareholders in an off-market buyback, following completion of the sale of its petrol business. Coinciding with the buyback announcement, Woolworths also provided an update on its struggling discount department chain’s (Big W) footprint and expected operating losses. Now, management expects to close around 16% or some 30 stores by fiscal 2022 but this footprint could be continuously adjusted due to more sales shifting to the online channel as well as the loss in market share to online competitors such as Amazon.
Focussing on the off-market buyback, the buyback price will be between 10% and 14% below the five-day Volume Weighted Average Price, or VWAP, to May 24 2019. However, with much of the buyback price comprising a fully franked dividend, there could be material benefits to taxpayers who have a low marginal tax rate. The final buyback price is yet to be determined, but our independent research provider Morningstar has a preliminary estimate of $25.80 which they have calculated applying the maximum discount of 14% to a historical VWAP of $30 per share. A capital component of $4.79 per share will be paid, with the remainder paid as a fully franked dividend. At a hypothetical assumed buyback price of $25.80, Morningstar expects Woolworths to buy back 65.9 million shares, representing 5% of currently issued shares.
In certain circumstances, shareholders such as superannuation funds in pension phase paying zero tax or individuals on a nil or low marginal tax rate could achieve a better outcome by participating in the buyback than selling their Woolworths shares at a higher price on market. Assuming a buyback at a 14% discount to a VWAP of $30 (for illustrative purposes) the value of the dividend, franking credit and capital component to an Australian taxpayer would total $34.80 gross, or 16% more than the hypothetical market price. The post-tax value to investors is dependent on various factors, including their marginal tax rate, the price paid for the shares, how long they’ve been held for and any existing capital gains from other assets.
The final buyback price will be determined on the 27th of May 2019, after the close of the offer. Investors can determine a price or discount to VWAP for which they would be willing to accept the offer and participation is optional. While the buyback could appeal to certain taxpayers depending on personal circumstances, we encourage all shareholders to carefully review the offer and applicability to their personal situations before acting on it.
If you have any further queries in relation to the offer and wish to discuss any matters in relation to your holding, please feel free to contact a member of our Wealth Management team on 03 9810 0700.