RE: Major share price rerate on even 10p dividend announcement17 May 2021 16:46
All IMHO, but my thinking went like this:
If there is an asset sale (rather than whole company sale) it could be for cash, for cash plus royalties, or for cash plus shares (which would lead to ongoing dividends – think NorNickel and Russal).
If the asset is as large as it looks, it may be beyond the means of most to stump up an acceptable full value on purchase so a deal involving upfront payment plus contingent value payment may be on the cards. This would lead to a 2 stage rerate. The share price could be expected to rerate around the expected value of initial payment special dividend plus forecast dividends. Once the Special Dividend is paid it would rerate again due to the value that has left the company and the forecast dividends being less certain.
If the forecast is to extract £2.8bn of value a year from the ground and EUA get a royalty payment or divi of 10% that’s 10p a share every year on the current number of shares. And the initial payment could be £2.8bn, £5.6bn (£1 or £2 per share, we don’t yet know). The market would make its call on what that means for the SP, both before and after the special dividend. All pretty standard.
Now the interesting bit.
However, if you are a Special Situations fund or the like, and have 10 million pounds you want to invest at the best risk/reward ratio you can get, and you know that EUA is promising a 10p dividend to shareholders holding shares on a certain date of record, wouldn’t you invest?
De minimis, if you buy the shares the day before the date of record and sell after the ex-dividend date you’ve made 10p on each share in a very short period of time with almost no risk. Even if the shares you buy are £1 each, you’ve still made £1,000,000 risk-free in a matter of weeks. Our SP is currently 28p.
HOWEVER
Every other Special Situations fund and other IIs looking at this have exactly the same idea. So they all have to buy the shares the day before their competitors to avoid the SP rise. Therefore the announcement of a special dividend would be like a starting gun being fired.
IMHO for a dividend as low as 10p you could expect the equivalent of a ramraid to acquire shares up to the point where the risk/reward ratio is no longer attractive. And I’d suggest that spending £1 to get £1.10 back in a few weeks is highly profitable if you’re investing large amounts. It’s as close to free money as you get.
If the Special Dividend were £1 it would be closer to a nuclear arms race.
Anyway, that’s my thinking and we’ll see soon whether it’s right or not.
DYOR always. Don’t take my, or anybody else’s, word for anything.
GLA
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