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Morningstar | Corporate Action: Metcash's Buyback Could Appeal to Taxpayers - Dependent on Personal Circumstances

Coinciding with the release of its results on June 25, 2018, no-moat Metcash announced an off-market buyback of AUD 125 million.

The buyback price will be between 8% and 14% below the five-day volume-weighted average price, or VWAP, to Aug. 10, 2018. We expect the buyback to be virtually value-neutral to Metcash, and we retain our AUD 2.40 fair value estimate. However, with much of the buyback price comprising a fully franked dividend, there could be material benefits to Australian tax payers who have a low marginal tax rate.

The final buyback price is yet to be determined, but our preliminary estimate of AUD 2.41 is calculated using a discount of 14% to a VWAP of AUD 2.80 for illustrative purposes. A capital component of AUD 0.61 will be paid, with the remainder paid as a fully franked dividend. In certain circumstances, shareholders such as superannuation funds or individuals on a nil or low marginal tax rate could achieve a better outcome than selling their Metcash shares at a higher price on-market.

Assuming a buyback at a 14% discount to VWAP of AUD 2.80 for illustrative purposes the value of the dividend, franking credit, and capital component to an Australian taxpayer would total AUD 3.18 gross, or 14% more than the market price. However, non-Australian taxpayers do not receive the franking credit, so would only receive AUD 2.41, or 14% less than the market price.

The post-tax value to investors is dependent on various factors, including their marginal income tax rate, the price paid for the shares, how long they've been held for, and any existing capital gains from other assets.

The final buyback price will not be determined before the close of the offer on Aug. 10, 2018. Investors can determine a price or discount to VWAP for which they would be willing to accept the offer. Participation is optional. We encourage shareholders to carefully review the buyback booklet and consult their financial adviser or tax accountant on whether to participate.