Before I start let me say that we are pleased with the $1.10 cash offer for our Vision Eye Institute shares, that the Board has handled the recent takeover interest in the company well, and generally we are pleased with how Vision has been run for the past five years following earlier troubles.
That said, franking credits should be the icing on the cake for Vision shareholders and they are being squandered for no good reason.
Vision announced yesterday that the distribution of 20c of franking credits wasn’t deemed ‘feasible’ by the Board. That was always a possible outcome, but the reasons are totally different from what we expected.
There are only two sound reasons not to pay out the franking credits:
- Franking credits not being distributable for legal reasons
- The acquirer, Jangho Group, refusing to restructure the deal
If they can’t be paid out, that’s that. But that’s not what the Board of Vision are saying at all. Instead the following rationale has been put up:
- Payment of a franked dividend would require an ATO ruling that takes 6-8 weeks
- That not all shareholders could capture the tax benefits of franking credits
- That the 45 day rule could be problematic for some shareholders
- That shareholders making a capital loss on the takeover couldn’t apply this loss to reduce the assessable income from a franked dividend
None of these points survives scrutiny. All investors on all tax rates can benefit from franking credits being released here.
If Vision declared a large franked dividend, shareholders on high tax rates, who don’t wish to receive a franked dividend, can sell to shareholders on low-tax rates, who benefit from franked dividends. That’s exactly what happened with RHG and the Dulux takeover of Alesco.
Shareholders who don’t benefit from franked dividends, don’t have to take them. Low-tax investors will bid the share price up, usually valuing the franking credits at around 50 cents in the dollar, which for Vision would likely bring the share price close to $1.20 prior to the dividend payment. A shareholder who doesn’t want to receive a franked dividend can then sell their shares and earn an extra 9% return, and those on low tax rates who wish to receive the dividend will do even better.
As to the 45 day rule, which coincides well with the time to wait for an ATO ruling, I don’t know any sane investor who won’t wait 45 days for a 9% return. (That’s roughly a 100% annualised return, if there is anyone that doesn’t like that I’d happily buy their shares at $1.10 if the Board flips and does pay out all the franking credits).
The real issue is of corporate boards being aware of the value of franking credits, and competent enough to structure takeovers so the value can be realised. Shareholders are crying out for it. Corporate Australia needs to wake up.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.