Should you participate in Metcash Limited’s share purchase plan?

Credit: Oberazzi

Corporate actions can be tough decisions for retail investors, as the decision to participate in share purchase plans, share buy backs or rights entitlement offers can cause undue investing stress, leading to poor decision making.

From the reporting season that was, shareholders of Insurance Australia Group Ltd (ASX: IAG) and Telstra Corporation Limited (ASX: TLS) are left deciding whether they should sell shares in the respective off-market share buy backs of both companies.

Similarly, small parcel shareholders of South32 Ltd (ASX: S32) are left making the choice of whether they should retain or sell their small parcel of shares (worth less than $500).

Finally, shareholders of Metcash Limited (ASX: MTS) are left with arguably the toughest choice of them all – whether they should participate in Metcash’s share purchase plan (SPP) or not.

About the Metcash SPP  

On 24 August, Metcash announced the acquisition of the Home Timber and Hardware Group from Woolworths Limited (ASX: WOW) for $165 million. The acquisition will be funded through a combination of equity and debt comprising an institutional share placement of $80 million (already completed) and $85 million to be drawn from existing debt facilities.

In addition, shareholders who were on the register as at 7PM on 23 August 2016 are entitled to participate in Metcash’s $20 million SPP for the purposes of reducing debt and strengthening Metcash’s balance sheet.

Offer details

Eligible shareholders are entitled to purchase new shares in Metcash at the lesser of $2 per share (the same price as the institutional placement) or the volume weighted average price between 12 September 2016 and 16 September 2016, after a 2.5% discount. The maximum amount is $10,000 per eligible shareholding, subject to scale-back.

SPP shares will be issued on 28 September.

Arbitrage opportunity?

At Wednesday’s closing price of $2.14, eligible shareholders are likely to acquire the SPP shares at $2 per share, implying a 7% return on the SPP price if prices persist.

However, investors should note that this return isn’t guaranteed given the potential for Metcash’s share price to fluctuate following the offer closing date (16 September) and SPP shares issue date (28 September). Furthermore, the “winner’s curse” hypothesis suggests that even if the current Metcash price persists, the likelihood of a scale-back would increase, meaning investors are not rewarded as expected for taking on the additional risk.

Accordingly, eligible investors shouldn’t participate in the offer simply to turn a quick profit.

Foolish takeaway

Corporate actions such as share purchase plans and share buy backs should never be tough decisions for eligible investors, given the fundamentals of a company don’t drastically change by these actions. Irrespective of whether you buy more shares in Metcash or not, its fundamental business of supermarket and hardware retailing should remain the same (albeit slightly expanded).

This means eligible investors must stand back and ask themselves the following: outside of the SPP, would you buy more shares in Metcash because of the HTHG acquisition?

If the answer is yes, than investors should take advantage of the discount on offer and participate in the SPP. If, however, the answer is no, then the fact that this is a corporate action with the potential to make a quick profit should have no bearing on your investment decision. After all, it’s rather foolish (without the capital F) to jump off a cliff just because someone tells you to jump.

CLOSING TONIGHT AT MIDNIGHT! -- Here's what happened to The Motley Fool's massive $1 million ASX bet...

Less than three years ago, Motley Fool boss Bruce Jackson bet $1,000,000 of company money (plus $500,000 of his own family's cash) on one unique service known as Motley Fool Pro. Now Pro is up a staggering 89%, darn near DOUBLING members' money! Simply click the link below to get a sneak peek at Pro's 3 biggest winners... the "golden egg" stocks that have powered Pro to 89% returns! Fair warning: Your special time-limited invitation won't wait.

Discover the 3 "golden egg" stocks - and your invitation!


Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.