RSA Preference shares - RSA takeover

whitebeard

Hi

As you know RSA has been the subject of an agreed takeover but the announcement says

RSA Preference Shares

RSA has in issue 125,000,000 RSA Preference Shares which are listed on the Official List of the London Stock Exchange. With the consent of the Panel, no separate offer will be made for the RSA Preference Shares.

Does anyone have any idea what this means in pracice. I hold the RSAB 7.3/8 Cum Irred prefs?
What will happen to them in future ?are they just taken over by the offeror?

Thanks in advance

Steve

JammyDodger

Yes

whitebeard

Hi Jammy,

To what part of my question does your reply refer.
Can you elucidate for me

Steve

JammyDodger

The preference shares will be taken over by the offeror and all the terms and conditions will remain the same.

whitebeard

Thanks Jammy,

Is that based on what normally happens or is there any other announced I haven't seen.
I contacted the IR section of RSA but they are very slow replying

Thanks again

Steve

JammyDodger

Ok, I'm not sure where to start but I'll try. The offeror does not have the ability to change the terms and conditions in the listing particulars/prospectus unless they provide monetary compensation. This is standard contact law. Where this to happen you have to decide what to do at the time.

However, the offeror hasn't given any undertakings as part of the offer with regard to the prefs either which you probably wouldn't expect them to.

The question you have to ask yourself is that in relation to the new owner of the prefs how will they interpret the terms and conditions in the listing particulars/prospectus and whether you are OK with that.

George

I'm wondering if I should sell my RSAB holding. The prospectus on their website seems to be a photocopy of the original but with relevant sections of their redemption options highlighted in marker pen (which I find odd):

4.(i) the shares will not be redeemable.

however 4.(iii) On a return of capital (otherwise than a winding up...) the holders shall be entitled to receive an amount equal to a nominal amount plus all arrears and accruals)

I'm no legal expert so I'm wondering if 4(iii) 'return of capital' can relate to the return of capital to shareholders of RSA due to the takeover and therefore Intact could exercise 4(iii). In which case, could the FCA do anything about it?

JammyDodger

Hi George, It is my interpretation that the return (redemption) of capital clause at par can only be exercised if the majority of the shareholders agree.

At present the RSA ordinary shareholders and pref shareholders are probably sufficiently aligned that the ordinary shareholders would vote down any such proposal.

(and by reference to the Aviva debacle RSA wouldn't want the publicity and having to deal with the issue)

However, once the takeover goes though the new shareholders will own all the ordinary shares and can do what they want which in my mind would include the abiltiy to vote for the capital return at par.

As you have mentioned it is extremely interesting that the copy of the prospectus on the RSAB website is not a clean copy but covered in electronic yellow highlighter around 4 clauses if I remember correctly much of which relates to capital redemption. Almost as if RSAB have put it there to highlight to shareholders the situation. Although to be clear it's been there in that format for some time and has not appeard this way post takeover approach.

I would pose the following question. The shares pay 7.375% which is expensive when they are being orphaned off as T1/T2 debt so any FD would want to replace it with something cheaper. They could buy it back in the market or for a tender offer off say 130p or they could redeem at par. The issue is £125m so redeeming them at par woud save £25m ish plus reduced on-going dividend payments.

You can see why Aviva were so keen to redeem theirs.

Please note this is my personal view and I am aware other posters on other bulletin boards have very different views and they see it as unimaginable they will be redeemed at par in practice. Whatever. They may be right but I still question given the additional risk here and no appreciable difference in running yield between this and the other prefs, it would be better to hold one of the others.

Of course the fact that the market isn't pricing in any risk here as shown by the running yield completely shoots down my position that there is a risk of capital redemption!!! so perhaps I am talking rubbish and seeing risks that aren't there.

George

I value your insight, JammyDodger. I'm guessing that highlighted pdf was uploaded after the Aviva incident as a mild 'buyer beware' warning so that anyone buying after March 2018 should be aware of any future risks. But I gather Aviva got into trouble because they were unclear as to their intentions re their prefs, rather than that they hinted they may redeem at par.

Most rsab holders are probably retail investors who are assuming (mistakenly or otherwise) that the new owners wouldn't dare redeem at par, hence no movement on the price.

I'm sure, as you suggest, the new owners will want to redeem these so holders, I think, should assume this may happen when the dust settles, perhaps before the first ex-div date in August or, more likely, March 2022. In which case, depending on how ruthless they are, they would:

a) redeem at par value.
or
b) redeem at around avg 3yr share price. In this case they could redeem around Jan 2022 at 125p to 128p , incl the Mar 2022 dividend without raising too many eyebrows.

I hope they would go for option b). But I will hold for next div in March and perhaps up until August div too if the takeover doesn't complete that quickly.