Woolworths shares up on news of share repurchase
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CAPE TOWN - Food and clothing retail chain Woolworths Holdings plans to securitise R1,9bn of its R2,3bn Woolworths card debtors book and distribute R1bn to its shareholders through a share repurchase, it said yesterday.
Woolworths told its shareholders in July that it was looking at ways to optimise the structure of its financial services balance sheet.
Securitisation, which has become increasingly popular among South African companies in recent years, is a way for companies to package good-quality receivables into a marketable interest-bearing instrument providing a cheaper form of finance than bank borrowings or equity. Retail group Edcon has so far securitised more than R3bn of its debtors` debt.
Woolworths shares surged 4% to R10,70 after the announcement. An analyst, who asked not to be named, said the market had been expecting this move for some time and the only question had been whether Woolworths would declare a special dividend or undertake a share repurchase. Whereas a special dividend was paid once and then forgotten, a share repurchase was earnings-enhancing in the long term.
The move is not expected to inhibit the tradability of Woolworths` shares, as it has a wide spread of shareholders. The last annual report shows that public shareholders hold 86,63% of the shares.
The repurchase of shares would improve the return on equity of Woolworths` financial services division, finance director Norman Thomson said yesterday. The return on equity of the group`s financial services division is about nine compared with the mid-20s on average for banks.
The reason for the difference is that the banks run highly geared lending operations whereas Woolworths is financing its debtors with equity. The group`s cost of equity is about 14%, so it is aiming for a return on equity on financial services of at least above that, and preferably above 20%.
The remaining R900m of the amount raised will be used to repay some of the group`s short-term debt.
An announcement on the repurchase price and ratio, which will be based on Woolworths` share price in the five days preceding the announcement, will be made before the end of March.
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