Investors in the Good Drinks Australia Ltd (ASX: GDA) share price might have woken up to a seemingly nice surprise this morning. On Monday, investors saw Good Drinks shares close at 9 cents a share. This morning, they opened at 90 cents a share, up an apparent 900%. Hallelujah!
Most unfortunately for investors though, this is not quite as good as it seems. Yes, Good Drinks shares were 9 cents earlier in the week, and are currently trading at 90 cents so far today. But if investors look carefully at their brokerage accounts, they will probably find that they own far fewer shares in Good Drinks than they used to.
That's because this company has just completed a share consolidation. A share consolidation is the opposite of the much more well-known practice of a share split (or stock split). That's why it's sometimes referred to as a 'reverse stock split'.
You might remember the hullabaloo over the US giants Apple Inc (NASDAQ: AAPL) and Tesla Inc (NASDAQ: TSLA) splitting their respective stocks last year. Apple did a 4-1 stock split while Tesla did a 5-1. That meant that investors in Apple, for example, woke up with 4 times as many shares as they had before the split, with each share worth approximately 4-times less than its value pre-split.
The opposite has just occurred with Good Drinks. But this shouldn't come as much of a surprise. The company gazetted this move more than a month ago.
Image source: Getty Images
Why has Good Drinks consolidated its shares?
Here's how Good Drinks explained it at the time:
Good Drinks Australia… proposes to seek shareholder approval… to consolidate its issued capital through the conversion of every ten existing shares into one share. The Company currently has 1,283,167,579 Shares on issue, which, for a Company of its size, is a considerable number. The Consolidation will result in a more appropriate and effective capital structure for the Company and a Share price more appealing to a wider range of investors…
While the share consolidation will have no effect on the underlying value of the Company, the effect on the Good Drinks share price at the time of the conversion should be to trade at 10 times the price at which it previously traded.
So basically, if an investor had 100,000 GDA shares on Monday, worth 9 cents each, they would have a total value of $9,000 of capital in the company. Today, that same investor would have 10,000 shares worth 90 cents each, with a total value of $9,000. AS you can see, it's just some numbers that have moved around. It means very little to Good Drinks investors in practice.
Sorry to burst anyone's bubble who thought they'd woken up 900% richer this morning!
