Download The Price Effects of Australian Structured Share Buybacks

The Price Effects of Australian Structured Share Buybacks
Keith Woodward and Graham Partington, 2016
Tax advantages of Off-market Buybacks
Price
In America the buyback price is usually higher than the market price. In Australia the buyback price is usually less than the market price. This is because the after-tax
The aftertax value
of the
buy-back
offer
value of the buyback is greater than the market price of the share.
The two tax benefits of the buyback are the:
franking credits attached to the franked dividend portion of the buyback price, and the
Actual
Market
Price
Price
Price
Value of franking credits
Tax on dividend
component
Franking Credits and the 45-day Rule
After-Tax Value of
Buy-Back Offer
=
Actual Market Price
After-Tax Value of
Buy-Back Offer
Tax on ‘gross-up'
Buyback
price
capital loss due to the capital portion of the buyback price being only a fraction of the market share price.
Actual
Market
Price
After-tax value of
capital loss
Franking credits provide a significant part of the after tax
Dividend component
value of shares successfully tendered in the buyback.
To be able to use the franking credits, shares must be held
‘True’ Market Price
Capital component
by domestic investors for at least 45 days before the buy-
‘True’ Market Price
0
back price announcement date (and scale back).
0
Time
Announcement
Date
Franking Credit
Drop-Off Date
Ex-Buy-Back
Date
0
Time
Announcement
Date
Franking Credit
Drop-Off Date
Ex-Buy-Back
Date
Before Arbitrage
Before Arbitrage
After Arbitrage
After Arbitrage
Buyback Price Floor set by ATO
The after-tax
value of the
buy-back offer
The ATO designates the maximum tender discount in an off-market buyback to be 14% of the VWAP prior to the buyback announcement.
Domestic tax-advantaged investors, particularly super funds, would tender shares below this amount if allowed. This is because the after-tax
value of the buyback is often significantly higher than the nominal cash buyback price.
The maximum 14% discount acts as a price floor, and tax-advantaged super funds are expected to bid up the market price of the stock as they
Market
price
Gain per
share
accepted
into the
buy-back
Market
price
=
New
market
price
After-tax
value of the
buy-back
offer
Buy-back
price
Price
Gain per
share
accepted
into the
buy-back
Buyback
price
Price
compete for the tax benefits of the buyback.
0
Buy-back announcement date
0.14
0.12
0.1
Actual and estimated daily abnormal returns
Ann actual return
Ann estimated return
0.08
Franking Credit Drop-off date
0.04
0.02
Actual and estimated daily abnormal returns
FCD actual return
FCD estimated return
0
0.06
0.04
=
After-tax
value of the
buy-back
offer
Buy-back
price
which
cannot fall
below
minimum
tender
price
(Pfloor)
Buy-back
price
which
cannot fall
below
minimum
tender
price
(Pfloor)
0
Abnormal Returns due to ATO Price Floor
Buyback announcement day positive abnormal return
Super funds may bid up the stock price on the buyback announcement date due to the price floor. But
this effect is difficult to separate from the other signaling effects.
-0.02
0.02
-0.04
0
-0.02
Franking credit drop off date negative abnormal return
-0.06
-0.04
On the earlier of the ex-buyback date or 45 days before the buyback tender price and scale back anPPT'11
JBH'11
CXP'05
WOW'01
CAA'00
STO'07
CCL'07
IAG'04
CML'06
CXP'07
STO'01
AWC'07
WBC'04
SGB'05
BHP'06
TLS'03
BHP'11
RIO'05
FGL'07
CML'05
TLS'04
BHP'04
WBC'05
BHP'07
CBA'04
WOW'10
WOW'03
BSL'05
BLD'08
STO'08
-0.08
PPT'11
BLD'08
CXP'07
JBH'11
STO'08
STO'07
BHP'07
AWC'07
WOW'03
CXP'05
STO'01
IAG'04
CML'06
BSL'05
BHP'11
SGB'05
CCL'07
TLS'03
WBC'05
WOW'10
CBA'04
BHP'06
TLS'04
BHP'04
CAA'00
WOW'01
RIO'05
CML'05
WBC'04
FGL'07
-0.06
nouncement, the franking credits detach from the buyback offer. This should correspond to a price
fall over the night before.
The size of the fall depends on the franking credit value and the share price premium above the 'true'
market price.