I got an email from Aviva. I’m no expert on shares. Could you explain it in layperson’s language please to your readers and what the pros and cons are?
It says: “The Board of Aviva is seeking the approval of shareholders for the cancellation of Aviva’s preference shares (the ‘Cancellation’). If successful, the Cancellation would have the effect of retiring 100% of the preference shares issued by Aviva.
In the event the Cancellation does not receive the necessary support of Aviva’s preference shareholders and ordinary shareholders or is otherwise not implemented, Aviva is in parallel inviting eligible preference shareholders to tender any or all of their preference shares for repurchase (the ‘Tender Offer’). The Tender Offer requires the approval of Aviva’s ordinary shareholders.”
Ms D.M.
You do wonder, at times, whether all these listed companies think their shareholders are practising lawyers. Maybe they wish they were.
In fairness, as with anything to do with ownership rights, it is important that things are precise and that any action being proposed is legally sound. But, I would argue, that still does not mean it has to be unintelligible.
Even the company’s version of a FAQ (Frequently Asked Questions) document, specifically designed to speak plainly to ordinary interested parties about the issues involved, is an exercise in obfuscation.
And, of course, Aviva has history here. The shares in question are called “cumulative irredeemable preference shares”. We’ll get to the preference bit in a minute but “irredeemable” in any person’s language means they cannot be redeemed – ie purchased back by the company.
But that’s precisely what Aviva tried to do in 2018 in a move that subsequently saw the insurer publicly censured by the Financial Conduct Authority, the UK’s financial services regulator.
Irredeemable, it transpired, did not mean the shares could not be cancelled. Worse still, Aviva tried to pay “par value” – ie £1 a share – for shares that before its move were trading closer to £1.75.
Unsurprisingly, that didn’t end well – an apologetic retreat by the insurer with a commitment to consider different options in any future attempt to cancel the shares.
So what’s different now?
Two things really. First, the damage done to the concept of “irredeemable” shares means they no longer command the premium in the market that they used to. Second, this time around, Aviva is offering a premium to tempt investors into cancelling the shares.
But why do they want to buy back the shares at all?
As cumulative preference shares, a signal attraction for investors is the guarantee of dividend income – in this case 8.375 pence or 8.75 pence per £1 share each year. But that’s expensive money for Aviva in an era when lower interest rates mean it can borrow any money it requires at a lower cost elsewhere.
And a rule change coming into force next year further undermines the case for retaining the shares. It means such shares will no longer be considered to be part of the firm’s regulatory capital – the minimum reserves it is required to keep to ensure it can absorb losses in times of financial stress without imperiling its policyholders and allowing it to continue operating as a viable business.
Without that requirement, this just become an expensive form of borrowing for the business.
The reason why this is an issue for so many Irish investors is that 150,000 people who were policyholders with Norwich Union were given shares in the business when it joined the stock market in 1997.
In many cases, they or their families still own those shares. Others will have bought into what is now the UK’s biggest insurer since. Retail shareholders account for the lion’s share of preference shareholders.
Some of those may be holders of this preference stock – although the £200 million in preference shares was originally issued by a company called Commercial Union, which merged with Norwich Union in 2000 before being rebranded Aviva in 2002. Others will have bought into it subsequently for its guaranteed income stream – those dividends.
Aviva is holding meetings of shareholders on Tuesday to decide a number of issues related to the preference shares.
First, there will be a meeting of preference shareholders only to see if they will approve the motion to have the shares cancelled. I gather that will require support of 75 per cent.
Then the full meeting of shareholders convenes. If the cancellation motion gets past the initial meeting, it will be put to the wider vote along with a vote on payment of a special dividend to those preference shareholders – though with preference shareholders having four votes per share in this instance to the one vote of ordinary shareholders, approval at the initial meeting should mean approval at the wider gathering.
If cancellation does not get support, the meeting moves on to a vote to tender for preference shares.
The difference is that a cancellation vote will allow the compulsory purchase of all £200 million in Aviva preference shares – a similar exercise is taking place at its General Accident subsidiary – while a tender offer will only purchase and cancel those shares that have supported the proposal.
As of last Wednesday, 99.4 per cent of retail shareholders holding just over 69 per cent of the preference shares voted in favour of the proposal. Among institutional shareholders, 100 per cent of the holders of 17 per cent of the preference shares also backed the plan.
Voting was concluding on Friday, the company tells me, but with almost 86 per cent of preference shareholders coming out in favour, it seems a done deal.
Yes, there are about 2.66 billion ordinary shares in Aviva, and only 200 million of these preference shares (carrying 800,000 votes in this instance) but given the cost of this funding, I would expect institutional holders of ordinary shares to back the plan, considering the premium being paid as decent value for both sides.
And how much is that?
Well, holders of the 8.375 per cent preference shares will get a 44 pence premium to the par, or face, value of £1 while holders of the 8.75 per cent preference stock will receive a special dividend of 50 pence.
Aviva says this represents a premium of between 12 and 16 per cent to the price these shares were trading at before the announcement last month to try again to cancel these shares.
So, if you hold preference shares, this is directly relevant to you; if not, less so. And in any case, it is now too late to vote one way or the other in advance of the meeting.
And the cons? Some preference shareholders will feel they should have got a better offer, though the voting figures suggest there is no real appetite for that fight.
For ordinary shareholders, the company is spending about £95 million sterling of your money to buy out these shareholders. However, given they had first dibs on dividends and were getting 8.375 or 8.75 dividend return compared to your return of about 5 per cent, it will probably be money well spent.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
