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BHP and FGL Off-Market Share Buy-Backs

March 15th, 2007 at 07:21 am

Both BHP-Billiton and Foster's Group have sent out the paperwork for an off-market share buy-back. It's a bit hard to calculate the exact benefit of taking up these offers as
* the number of shares accepted may be scaled back, leaving me with a smaller parcel of shares in the company
* the final buy-back price will be determined in the tender proces, and will be at a discount to the market price of between 10%-14% (BHP) and 5%-14% (FGL)
* the amount of the buy-back price subject to capital gains tax will depend on the final buy-back price, as the "capital component" PLUS an "excess tax value" equal to the difference between the "tax value" of the shares at the time of the buy-back (as determined by the ATO) and the final buy-back price
* the amount of the buy-back price assessed as a fully franked dividend will be the difference between the final buy-back price and the "capital component"

As I'll probably have a marginal tax rate of 30% this year (it depends what tax deductions I arrange through pre-payment of 12 months of my margin loan interest) the franking credit of 30% with offset the tax due on the "franked dividend component" of the buy-back. This will mean that I only have to pay 15% CGT on the amount by which the capital component and excess tax value exceeds the orginal purchase price of my shares. As I haven't got all the old paperwork sorted for my BHP and FGL share purchases I don't really know if I'll likely make a net capital gain or capital loss on these buy-backs, but in any case it will be a much lower CGT liability than if I sold these shares for full market price. Exactly how beneficial the buy-back is compared to selling the shares for full market price will depend on the popularity of the buy-back, and hence what the final tender price discount is.

I'll have to sort out the cost base my BHP and FGL shares this weekend so I can decide whether or not to accept the buy-back offers before the tender period closes (23 March for BHP, 5 April for FGL).

If the after tax proceeds of the buy-back look better than selling the shares on market I'll probably take up the offer for all my shares (3,751 FGL and 748 BHP) as I was planning on liquidating my stock portfolio of the next few years and reinvesting the funds in a DIY retirement fund (SMSF). I also have to do some estimates of how beneficial it will be to sell and reinvest the after CGT funds in stocks within a SMSF compared to retaining my current geared portfolio outside super and selling it off during my retirement when I should be able to restrict capital gains tax rate to around 10% anyhow.

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