In brief: The drive for an efficient capital structure has seen a number of high-profile Australian companies conduct off-market share buy-back tenders in the past year. We advised BHP Billiton on its recent buy-back, the largest off-market buy-back in Australian history. Lead partner on the transaction, David Wenger,(view CV) and Lawyer Tim Turton discuss some of the unique features of this buy-back.
A number of high-profile Australian companies that have conducted off-market share buy-backs in the past year include the Commonwealth Bank (February 2004), Westpac (May 2004) and Telstra (September 2004). While the Australian market is familiar with off-market share buy-backs, the buy-back recently conducted by BHP Billiton Limited is pioneering certain aspects of the process that will be of interest to those companies looking to implement a similar scheme.
Background
An off-market buy-back tender is becoming a commonly used capital management mechanism in Australia. It allows a company to buy back its shares at a price that is less than the prevailing market price on the stock exchange because, among other things, the buy-back proceeds are treated in a manner that has Australian tax outcomes which may be valued by Australian resident shareholders.
AAR recently acted for BHP Billiton, which, on 23 November 2004, announced Australia's largest ever off-market share buy-back of 180.72 million shares at a total cost of approximately $2.272 billion. The BHP Billiton buy-back was structured as if it were an equal access scheme, allowing eligible shareholders to tender any number of their shares at discounts of between five per cent and 14 per cent of the prevailing market price, or at a final price tender. The actual buy-back price that was selected by BHP Billiton represented a 12 per cent discount to the five-day volume weighted average price (VWAP) of BHP Billiton's shares prior to the close of the offer period.
Key characteristics of the buy-back
Although similar, in many respects, to previous off-market share buy-backs, the following key characteristics of the BHP Billiton buy-back are relevant to companies with significant foreign shareholders and those looking for greater certainty in their buy-back pricing structure.
Excluded shareholders
Because of the number and diversity of BHP Billiton's shareholders, the buy-back faced the difficulty of excluding certain countries' shareholders whose laws did not allow them to participate on the terms proposed by the company. This was particularly the case in North America. BHP Billiton was able to obtain relief from the Australian Securities & Investments Commission (ASIC) to permit the buy-back to proceed as if it were an equal access buy-back, even though those shareholders were excluded from participating, on the condition that any shares were bought back at a discount of at least five per cent to the five-day VWAP of BHP Billiton shares at the close of the offer period.
The combination of the minimum five per cent discount, the unique Australian tax treatment for Australian resident shareholders (with part of the sale proceeds being regarded as a fully franked dividend and the balance being treated as proceeds on disposal) and the fact that non-Australian shareholders could obtain a more attractive outcome by selling their shares on market was sufficient for BHP Billiton to conclude that the relevant non-Australian shareholders would not be disadvantaged by being excluded from the buy-back. That conclusion was important in BHP Billiton's decision to proceed with the transaction, as well as ensuring that the deal did not create any regulatory issues.
Discount to market price
In structuring its off-market buy-back, BHP Billiton introduced a new tender pricing structure. While the company continued to use the reverse Dutch auction approach of seeking offers from shareholders and then using those offers in a bookbuild process in order to set the buy-back price, BHP Billiton did not adopt the commonly used structure of giving shareholders a number of specified prices to choose from. Instead, BHP Billiton requested shareholders to bid a discount of 5-14 per cent to the five-day VWAP immediately before the close of the offer period. This was preferable for the company as, among other things, it:
- ensured that the pricing points remained relevant throughout the tender period, regardless of movement in BHP Billiton's share price;
- reduced the potential price range that was required under a fixed price structure; and
- provided increased certainty to participating shareholders by fixing the buy-back price by reference to the share price of BHP Billiton at the end of the offer period.
The interesting question will now be whether the market follows BHP Billiton's lead in using the fixed discount structure or reverts to the fixed price structure, or whether both structures will be used depending on the circumstances of the company that wishes to engage in management of its capital.
Minimum price condition and extended offer period
In order to ensure that the fixed discount tender structure adopted by BHP Billiton could not result in shareholders selling their shares at a price that was lower than a price that they wished to receive, the company also gave shareholders the option of choosing a minimum price condition. The minimum price condition was another market first, and was a useful corollary to the fixed discount pricing structure.
Furthermore, BHP Billiton extended the tender period to midnight on the final day of the offer period so that shareholders could wait until the final five-day VWAP price was calculated before submitting their tender. Shareholders could then apply their preferred discount to the final market price and thereby obtain certainty as to what their buy-back price would be. The company committed to having the final five-day VWAP calculated before 6pm on the final day of the offer period and posted on its website, and to accept fax and CHESS acceptances until the midnight deadline, in order to facilitate any shareholder concern in that regard.
Conclusion
As more companies look to explore alternative means of returning capital to their shareholders, the flexibility and benefits associated with an off-market buy-back are making it an attractive option for consideration. BHP Billiton has demonstrated how companies may build on market practice in order to suit the company's particular circumstances and to achieve results that are better aligned with the company's capital management objectives.
