As a shareholder, what are the pros and cons of a Share Consolidation and Return of Capital?

Question

I hold shares in Land Securities, in a SIPP. My SIPP provider has written to me to let me know this:

Following the recent sale of its 50% equity interest in 20 Fenchurch Street EC3M, Land Securities has announced that it intends to return approximately £475 million of the proceeds to Shareholders through a Return of Capital, followed by a Share Consolidation.

Under the terms of the Return of Capital and Consolidation, Shareholders at the close of business on 27 September 2017 will receive 15 new Shares in place of every 16 Shares held, plus a Return of Capital of 60p for each Share held at the qualifying time.

The Share Consolidation is designed to maintain the comparability of the Company's Share price before and after the Return of Capital. It is expected that the value of your remaining Land Securities Shares immediately after the Consolidation, plus the value of your Return of Capital, will be broadly comparable with the value of your Shareholding immediately before the Consolidation.

The share price is currently 962p. As I understand it, this process will convert each {16 current-shares} I hold into {15 new-shares and 60p}, with the actual value being approximately equal. Therefore the new share price should be ~1022p. So that part of this process is a bit like a share reverse split. I understand what one of those it, and don't care about them.

However, the Return of Capital I'm less clear on. I'm being offered the opportunity to vote for or against this action. Generally I'm inclined to trust management to do what is best for shareholder value, but in this particular case what are the pros and cons of this action, from my perspective as a shareholder?

Answer 1

The basic theoretical reason for a company to return money to shareholders is that the company doesn't need the money for its own purposes (e.g. investment or working capital). So instead of the company just keeping it in the bank, it hands it back so that shareholders can do what they think fit, e.g. investing it elsewhere.

In some cases, particularly "private equity" deals, you see companies actively borrowing money to payout to shareholders, on the grounds that they can do so cheaply enough that it will improve overall shareholder returns. The trade-off with this kind of "leveraging up" is that it usually makes the business more risky and every so often you see it go wrong, e.g. after an economic downturn. It may still be a rational thing to do, but I'd look at that kind of proposal very carefully.

In this case I think things are quite different: the company has sold a valuable asset and has spare cash. It's already going to use some of the money to reduce debt so it doesn't seem like the company is becoming more risky. Overall if the management is recommending it, I would support it.

As you say, the share consolidation seems like just a technical measure and you might as well also support that. I think they want to make their share price seem stable over time to people who are looking at it casually and won't be aware of the payout - otherwise it'd suddenly drop by 60p and might give the impression the company had some bad news. The plan is to essentially cancel one share worth ~960p for every payout they make on 16 shares - since 16x60p = 960p payout this should leave the share price broadly unchanged.