TA to buy back shares

4 June 2013

ZIMBABWE Stock Exchange-listed conglomerate TA Holdings Limited says it will later this month seek shareholders’ permission to buy back a maximum of 10 percent of its issued ordinary share capital.

The proposal would be tabled at the company’s annual general meeting scheduled for June 27, which would consider a raft of other issues.TA said the AGM would consider, if deemed fit, by way of special resolution, with or without modification, that “the shares to be purchased under this resolution shall not exceed 10 percent of ordinary shares of the company in issue prior to the date of this resolution.

“The purchase price shall not be lower than the nominal value of the company’s shares and not greater than 5 percent above the weighted average trading price for such ordinary shares traded five business days immediately preceding the date of purchase of such company shares by the company,” the conglomerate said in a statement.If granted, the authority would fall on the date of the company’s next AGM with all shares acquired under this authority put to Treasury.

TA said it will be able, in the ordinary course of business, to pay its debts, maintain assets in excess of its liabilities after the share buyback and have working capital adequate for the next 12 months.

Share buybacks come in two main forms, namely an offer to stockholders to buy up to a certain number of shares at a fixed price (usually at a premium over the market price). There is a time limit on the offer. The other way is to buy the shares in the open market over a period. Companies often use this method when the stock’s price is especially depressed.

There are several reasons why a company may want to buy back shares of its own stock, some of them for the benefit of stockholders, while others have less altruistic purposes.If a company is sitting on a large sum of cash and must decide how to invest it, one of the options is to distribute part of it to shareholders.

Companies can do this either of two ways: as dividends or buying up outstanding shares.If it chooses to buy up shares, stockholders benefit even if they do not sell by the reduction in outstanding shares.If a company’s stock is suffering from low financial ratios, buying back stock can give some of the ratios a temporary boost.Key ratios like earnings per share and price earnings ratio look better because they are based on the number of outstanding shares.

Another reason companies buy back stock is to cover large employee stock option programmes. The effect of these programmes, which were out of control during the tech boom of the late 1990s, was to dilute the stock and shareholder’s equity. Buying back shares reduces dilution and increases shareholder value.

Some companies buy back shares as protection against hostile takeovers from other companies.Gathering outstanding shares off the open market makes it more difficult for a raider to take control.