Nedbank completes Old Mutual split; odd-lot offer gets green light

By Sasha Naryshkine

Nedbank are set to proceed with an odd-lot offer to all Nedbank shareholders with less than 100 shares. The term odd-lot goes back to a bygone era of floor trading, with no electronic dealing and manual settlement of trades. As only institutional and retail customers of size and wealth were the primary market investors, buying a lot of 100 shares (and multiples thereof), was not an issue, it was merely price dependant. In an electronic era where brokerage houses have become fully electronic where smaller retail brokerage customers can trade at a far cheaper cost in odd-lots (less than 100 shares), this has widened shareholder bases across the globe.

The decision taken by the Old Mutual board and shareholders to partially unbundle its ownership of Nedbank to its existing Old Mutual shareholders, has vastly increased the shareholder base of Nedbank from around 20,000 to around half a million shareholders. By way of background Old Mutual reduced its Nedbank stake to 19.9 percent in October this year, by unbundling a 31.73 percent of its Nedbank stake to its shareholders, in the ratio of 3.21176 shares of Nedbank for every 100 shares of Old Mutual held at record date.

A quick check of the Old Mutual shareholder base from the last annual report, 2017, where it is written under shareholder analysis “As at 31 December 2017, the Company had approximately 478,634 underlying shareholders”, translates to many more Nedbank shareholders as a result of Old Mutual shareholder decisions.

The reason in turn for so many Old Mutual shareholders dates back to their de-mutualisation and subsequent listing of the company back in 1999, whereby the policyholders of Old Mutual were converted to shareholders. The Old Mutual 1999 annual report suggests that there were around 936,000 shareholders of Old Mutual.

Nedbank odd-lot offer

Most of this current category of Old Mutual shareholder is in the 1 to 1,000 shares base, meaning that at very best (1,000 shares), an Old Mutual shareholder of that scale would have 32 Nedbank shares. The tipping point, of taking ownership over the unbundled 100 Nedbank shares per Old Mutual share ownership is 3,114 Old Mutual shares. In other words, for the above ratio to exempt you from the odd-lot offer, you would have to own 3,114 Old Mutual shares, and at approximately R23 of value (per Old Mutual share) this is nearly R72,000. In a diversified portfolio, that does not sound like your run of the mill average private client retail customer. 100 shares of Nedbank at a current price of around R255 translates to R25,500.

For Nedbank, with a vast new shareholder base, costs are borne to the shareholders ultimately, they own the business. Whilst it is good to see improved liquidity in a share price and having many stockholders, the shareholder cost of having to send out half a million circulars and the associated administrative costs involved are high. Not to mention having to provide sausages and drinks at AGMs and results presentations to many more hungry mouths. Whilst the printing houses would welcome new business, it makes far more “logistic” sense for Nedbank to have to deal with a smaller and nimbler shareholder base. As a case in point, the Nedbank circular detailing the cost of the exercise puts the printing, publication and distribution costs at R16 million out of a total R24.65 million cost.

Let me explain quickly what is going to happen. As per the odd-lot offer, the shareholder base of Nedbank would shrink back significantly, whilst at the same time only eliminating 1.5 percent of the Nedbank shares in issue. In the 24 page odd lot offer circular issued by Nedbank on the 24th of October 2018, the rationale is as follows:

The Odd-lot Offer will provide Odd-lot Holders with the ability to dispose of their Odd-lot Holdings on an efficient basis, and will provide liquidity for those Odd-lot Holders who elect not to retain their Odd-lot Holdings or who make no election. Odd-lot Holders can elect to retain their shareholding in Nedbank Group. For Nedbank Group, it will, inter alia, reduce the complexity and cost of managing a significantly larger shareholder base.

As an odd lot holder you will not be subject to any costs, plus you will receive a 5 percent premium to the 10 day volume weighted average price (VWAP) up to the close of business on the 3rd of December 2018. The default, and this is important, is for Nedbank shareholders with less than 100 shares (an odd lot) to automatically take the odd-lot offer from Nedbank. Nedbank will shell out R2.119 billion approximately to buy out the odd-lot shareholders and pay the associated costs.

This will be entirely funded from existing cash reserves, which has the impact of reducing the Nedbank Group’s tier 1 ratio by 40 basis points from 12.4 percent to 12 percent. As the shares will be cancelled, there is an ever so slight Earnings Per Share bump up.

The dates of payment for odd-lot holders is expected to be Tuesday 18 December, a SENS will be released at the same time. A welcome time for smaller retail investors, either to supplement festive season purchases, or to look for listed bargains.