Published Date: 2021-10-11 | Source: INCE|Community | Author: The Finance Ghost
After releasing a cautionary announcement regarding its preference shares on 21 September, Nedbank has now made a firm intention announcement to acquire all its preference shares under a scheme of arrangement, with a standby offer in place in case the scheme doesn't go through.
These shares were issued between 2002 and 2010 at a time when banking regulations made preference shares an attractive source of capital for banks. Changes to banking regulations have made preference shares less appealing for the banks. From 1 January 2022, there is no benefit at all to Nedbank under regulatory capital rules from having preference shares in issue.
The bank is acting in its own interests here, not the interests of preference shareholders, which is the correct approach. The directors have a fiduciary duty towards the company itself, not a specific group of capital providers.
Having said that, preference shareholders will likely be happy with this liquidity solution. Over the lifetime of the shares, trading volumes and liquidity were low, with a resultant negative impact on pricing.
The shares were originally issued at between R9.90 and R10.68 depending which tranche you look at. Before the cautionary announcement in September, they were trading at R7.66. After the cautionary, this jumped to R9.94 before the firm intention announcement was released. Remember that over this period, the preference shares would've paid dividends as their primary reason for existence, so there's a story beyond the traded price.
The price offered to holders under the scheme of arrangement is R9.79. Those who opportunistically bought preference shares in the hope of a buyout have done well but finding preference shares to buy in any great quantity would've been extremely difficult.
If for any reason the scheme isn't approved by shareholders (an unlikely outcome in my view), there is a general offer at R9.04. Nedbank wants to get rid of these shares entirely and delist them, hence the scheme price (which would achieve this outcome) is higher to entice shareholders to vote in favour of it.
Given the terribly low liquidity, I can't see why shareholders wouldn't approve this transaction. Nedbank has received letters of support from holders of 24.13% of the preference shares. These are mainly asset managers and insurance companies.
If the scheme goes ahead, Nedbank will pay R3.5bn to make these preference shares go away. It will be interesting to see whether any holders try and go the s164 route to push for a higher price. This is a mechanism in the Companies Act that allows shareholders to fight for what they believe to be the fair value of the shares. The s164 route is legally complex and thus expensive because lawyers aren't cheap.
Note that the ticker for these preference shares is JSE:NBKP. Ordinary Nedbank shares trade as JSE:NED.