December 17, 2021 (MLN): Following the recent allocation of $120mn to its TRG’s shareholders, TRG can either distribute it through cash dividend or announce a buy-back. Since TRG has convened a board meeting today, investors are curious to know what would be opted by the company.
To recall, TRG Pakistan informed PSX on December 10, 2021, that the board of the Resource Group International Limited (TRGI) approved the allocation of its liquid assets to its shareholders whereby TRG Pakistan’s portion would be approximately $120 million (inclusive of around $10mn in deferred cash) plus approximately 5.4 million shares of its listed portfolio company, Ibex Limited.
The process and structure for utilization of the above allocation are expected to be finalized by 31 December 2021, and the company will announce further details at that time.
Topline Securities highlighted in its report dated Dec 10, 2021, that the company may announce a cash dividend of Rs33-35 per share or choose buy-back.
In this connection, the brokerage house in its latest report analyse the key points of SECP’s amended buy-back regulations for Listed Companies and try to study operational issues a company may face doing a buy-back.
The purchasing company can announce buyback through tender offer or purchase through the exchange. The board first recommends buy-back, mode of purchase, number of shares to be offered, and a price if the buy-back is through a tender offer.
Through the tender offer, the purchase price is recommended by the board and it shall not be less than the preceding five trading days weighted average price of the shares.
This is to be followed by a general meeting in which the special resolution is to be passed not later than 30-days than the board meeting where the buy-back/treasury stock is recommended. It has to be passed by 3/4th of such members of the company entitled to vote as are present in person or by proxy at the general meeting which itself is cumbersome, the report noted.
The report also explained through the example of Nishat Chunian (NCL) that price can be modified from the initially proposed price as was the case with NCL, where members approved buy-back price of Rs34 in special resolution, higher than the initially proposed price of Rs32.
The board of NCL recommended shares buy-back of up to 32mn shares at a price of Rs32 on Aug 9, 2021, 17% higher than the market price of Rs27.41. It was followed by a general meeting on Aug 31, 2021, when the final price of Rs34 (Rs2 higher than Rs32) was approved in a special resolution where the purchase was to be made from Sep 9, 2019, to Oct 8, 2019.
Since the announcement of buy-back to the end of the purchase period, the market price of NCL surged by 34% to Rs36.71/share. Out of the proposed 32mn shares to be bought back, only 102,527 shares were tendered by the shareholders.
This generally gives an idea about the operational and practical issues company has to face as the cash available may not deploy when going for a buy-back, which TRG may have to consider
Even then there is an inherent risk whether the purchasing company successfully acquires the number of shares it intends to buy back or not which did not happen in NCL.
The purchase period from the tender offer shall be for a period of 30 days commencing from dispatch of the letter. The purchasing company at all times during the purchase period has to maintain a deposit equivalent to 25% of the consideration payable in the escrow account and the remaining amount shall be deposited at least three working days before the close of the purchase period, Umair Naseer, Analyst at Topline Securities said.
The entire process of buy-back takes at least 2 months, the cash is stuck for the company during the period, he added.
To recall, few companies had announced buy-backs through tender offers including Nishat Chunian (NCL), JS Investment (JSIL), Arif Habib Corporation (AHCL), Arif Habib Limited (AHL) recently.
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