United kingdom Daily news: MIDAS:You won't suffer in the Royal Bank of Scotland share swap

Minggu, 13 Mei 2012

MIDAS:You won't suffer in the Royal Bank of Scotland share swap

MIDAS:You won't suffer in the Royal Bank of Scotland share swap

By Simon Watkins

PUBLISHED: 15:22 EST, 12 May 2012 | UPDATED: 16:44 EST, 12 May 2012

Small investors do not trust Royal Bank of Scotland as far as they could throw it. At least that is the case if Midasâ€™s mailbag is anything to go by.

The recent announcement by RBS that it was planning a share consolidation has alarmed some of its 214,000 individual shareholders, who will have the chance to vote on the plan at the annual meeting on May 30. Given that the Government holds 66 per cent of the voting shares, these resolutions will be passed as a formality.

But what does the consolidation mean for small investors?

RBS is proposing a two-stage process. In the first step, each share will be divided into a new ordinary share and a new deferred share. Immediately after this split comes the consolidation. For every ten ordinary shares the investor then receives one new share. Meanwhile, the deferred shares are given back to RBS, which will then cancel them.

The lurching bank: How Royal Bank of Scotland shares are more volatile

In practice, at the end of the process each shareholder will hold one new share for every ten old ones they held. Each new share will be worth ten times the value of the old ones. So, ignoring any share price movements, an investor who today holds 100 shares worth 24p each will after the consolidation own ten worth 240p each. This process will apply to all shareholders, including the Government.

The main issue complicating this plan is the creation and cancellation of the deferred shares. Some investors fear that handing these back means they lose part of their stake.

This is not the case.

The deferred share is being created for technical reasons and it is crucial to understand that no one is losing any of their stake, either in terms of its value or as a percentage of the group.

And there is no need to take RBSâ€™s word for this. Ian Gordon, banking analyst at asset manager Investec, is emphatic: â€˜This has absolutely no impact whatsoever on the fundamental value of the company or on any individual shareholderâ€™s stake.â€™

Another concern that some investors have voiced is the effect on fractional shareholdings. For example, if you hold 1,004 shares, the consolidation will create 100 new shares, with four old shares remaining.

All these leftovers from individual shareholders will be combined, sold off and the proceeds given to charity. Shareholders will be given the option to receive a cheque instead. The largest possible remainder will be nine shares, which at Fridayâ€™s close would be worth a total of Â£2.07.

So why is RBS doing this? It says the main purpose is to reduce the sharp movements in its share price. There is no doubt that its shares are more volatile than those of most FTSE 100 firms and the bank reckons being a â€˜penny shareâ€™ is contributing to the problem.

Cold logic says this is nonsense on stilts. Just as the consolidation makes no difference to the value of any shareholderâ€™s stake, it should make no difference to the companyâ€™s value. If the market decides the group is doing badly and is worth half its value then each share will halve in value whether from 24p to 12p, or 240p to 120p.

Investecâ€™s Gordon is also emphatic that he can see no merit in the volatility argument. â€˜I do not believe it will make any contribution to reducing volatility. That may happen over the years ahead, but it will be nothing to do with this consolidation,â€™ he says.

Midas verdict: Donâ€™t panic. Fears that this plan amounts to an expropriation of shares, or will reduce the value of your stake, are without foundation. Concerns that the Government is doing better out of this than other investors are also wholly misplaced.

But will it help the RBS share price become less volatile? I have previously said that there might be a scintilla of truth in the idea that being a penny share is unhelpful. Indeed, the worried reaction of some small shareholders to this technical change suggests the nominal value of a share can affect irrational sentiment.

But it is a very arguable point and in the big picture of RBSâ€™s restructuring and rehabilitation, it is probably a diminishingly small effect. The best that can be said of this move is that it might at the margin make a tiny difference to the sharp movements in the share price. At worst it will have no effect at all and will prove a bit of a waste of time, effort and money.