In yesterday’s record market, Wesfarmers shares hit a 52 week high of $38.90, a 61c rise as investors again punted on some sort of private equity buyout of Australia’s largest and most diversified industrial conglomerate.
They are still well shy of the all time high of more than $42 a share reached back at the start of 2005.
With the best part of $1.2 to $1.3 billion promised or spent in the past six months on expansion in insurance and industrial gases, Wesfarmers has decided that reactivating its dividend reinvestment program will be the best way to raise equity to support the deals.
The company has bought insurance brokers OAMPS in Australia for around $700 million; New Zealand’s largest locally owned broker (for a few million) and is completing the $500 million acquisition of the local operations of industrial gas group, Air Liquide.
The company examined an equity raising but has decided to tap shareholders on an ongoing basis for the funds needed to cut its debt to equity ratio.
Since that was announced on January 9 the shares have risen around $1.70 a share.
The plan was suspended almost four years ago in February 2003 when Wesfarmers decided that it had enough capital and the then CEO, Michael Chaney decided to settle down and make a string of acquisitions pay their way without any new funding from shareholders.
He felt that with strong cash flow and low debt levels the company didn’t need to tap shareholders.
The last DRP which operated in the last half of 2002 calendar year raised something like $300 million for the company with a solid participation rate.
But now the Board has decided, following those acquisitions, to reactivate the Plan from February 27, which will also be the record date for the interim dividend payable for the 31 December 2006 half. The Plan will apply to future dividends unless notice is given of its suspension or termination.
Wesfarmers says that a two per cent discount will be applied to the price of the shares allocated under the Plan in relation to the interim dividend for 2006-07.
The Board also decided to make a number of amendments to the Plan to become effective when it is reinstated. The three main amendments, which are intended to improve the administration of the Plan and ensure it remains cost effective, are:
· Changing the basis on which the price of the shares to be allocated under the Plan will be determined and providing the directors with the discretion to select the period (which will still be not less than five consecutive trading days) over which the price will be calculated. The more flexible pricing calculation period will enable the directors to select a pricing period such that the price of the shares allocated under the Plan should reflect the market price. For the purpose of the interim dividend for 2006/07 the directors intend to select the period of 10 consecutive trading days from and including the second trading day after the record date.
· Giving the directors discretion to transfer shares to participants in the Plan in addition to the current power to issue shares. This change will provide the directors with the flexibility to determine the most appropriate source for the shares to be allocated under the Plan having regard to the company’s overall equity position and requirements at the relevant time. It may also enable the directors to continue the Plan in periods when it would otherwise be more appropriate to suspend its operation.
· Allowing notification of any future amendments to the Plan to be given by way of an announcement on the Australian Securities Exchange. This will enable the directors to determine the most suitable and cost effective way to notify shareholders of changes to the Plan.
Under other changes shareholders electing partial participation will now have the option of specifying a number of shares or a percentage of their shareholding for partial participation in the Plan rather than being required to participate in respect of 50 per cent of their shareholding.
With the new Plan having a two per cent discount against a zero discount in the previous Plan, WES is trying to entice a higher participation rate from smaller shareholders.
WES gearing is now above the company’s targeted range, and with a historically high level of participation in its Plans, the company is looking to smaller shareholders to support this painless way of raising new equity.
With a participation rate estimated at around 40 per cent (based on previous DRPs) the reactivation of the Plan could see upwards of $300 million raised each year it remains in operation.
That will drop WES net debt to equity ratio from well over 100 per cent down to the high eighties by the end of fiscal 2008.
