On-market share buyback programmes are a popular method to return excess cash to shareholders (as opposed to increasing dividends); as they reduce the level of share capital in the market, they have the advantage of increasing earnings per share and a corporate’s gearing ratio. Since 2022, UK listed companies have spent approximately £50bn a year on share buybacks.
As a corporate treasurer, what are the top 10 things you need to think about when you are launching a new buyback programme?
Gone are the days when a buyback would invariably be carried out by your corporate relationship brokers: there are multiple investment banks that offer this service and it is worth taking the time to explore the different options available. Make sure you are getting the most competitive pricing (both in terms of commissions charged and the price paid for the shares). Also explore what other doors can be opened (for example, on the lending side).
Buyback programmes entail a number of administrative burdens. When choosing a broker, you should think about what additional support they can offer. For example, many brokers will release the required daily post-trade announcement on your behalf: this will be music to the ears of your company secretarial colleagues, who would otherwise have to stay late and arrange this every evening for months on end.
Some buybacks are carried out for a fixed commission. However, most UK buybacks incorporate some sort of incentive for the brokers to buy as many shares as possible within the set budget. This ensures the company pays the lowest possible price for its shares. At the end of the programme, the broker will calculate the average price per share the company has paid over the life of the programme and compare that to a benchmark price. The benchmark price is usually the volume-weighted average price (VWAP) per share in the market for the period, sometimes with a discount applied. Pricing models include:
The target spend typically excludes stamp duty (at 0.5%) and broker fees. It is essential that you understand the rationale and mechanics of how the true-up payment is calculated: ask the broker to model different scenarios or give an indication of the expected range so you are not taken by surprise by the invoice that lands in your inbox at the end of the programme. This will also help you explain the true-up payment to your CFO.
There are many different options for how your programme can operate. Your chosen broker can advise on what is realistic and how that impacts your pricing options. For example:
To fund a buyback programme you will need both accessible cash and sufficient distributable reserves. If you are borrowing to finance the buyback, will you come under fire from investors for doing so? Or is the fact that cost of equity is more expensive than cost of debt sufficient justification? If you are using cash on the balance sheet, could investors criticise the company for not investing that cash into long-term growth?
Companies sometimes get caught out where the group as a whole has enough distributable reserves but these are not at the plc level. Make sure intra-group dividends are paid up if necessary so that reserves are available in the individual accounts of the top company. If the most recent audited individual accounts do not show sufficient reserves (e.g., because you are relying on the proceeds of a recent disposal) you will need to prepare interim accounts and file those at Companies House before the buyback – otherwise the whole programme will be invalid.
Repurchased shares can be cancelled or held in treasury. Treasury shares may be used to satisfy employee share awards or sold for cash in the future. If you want to keep the shares in treasury you will need to set up a CREST account for the company, which can take several weeks.
Companies often seek the right to terminate a buyback programme mid-flow without cause. This is usually acceptable to brokers, subject to the company not having inside information and not being in a closed period at the time of termination. However, it may cost you: brokers cannot guarantee they will achieve the desired pricing if you pull the plug early and so any VWAP discounts will usually be forfeited in these circumstances.
You may wish to split your programme into different tranches (for example, a £100m total return carried out in two tranches of £50m). This gives you the chance to reflect on how things have worked with the first tranche and change the terms, or the broker, for the next tranche.
However, if the company has inside information when the time comes (for example, it is in the middle of negotiating a material acquisition) you might have to hold off launching that second tranche until the inside information has been announced (or has gone away).
Your legal and company secretarial teams will need to be involved in advance: to carry out checks on the legality of the programme, to ensure necessary approvals are obtained, and to set up processes for Companies House filings, total voting rights announcements and other ongoing obligations. Seeking advice from external counsel familiar with market practice can also help ensure that you are getting the best possible terms in your broker engagement.
Lucy Reeve is a corporate partner at Linklaters LLP. She regularly advises FTSE 100 and FTSE 250 companies on their share buyback programmes and other returns of cash to shareholders. With thanks to Jasmeet Matharu at IG Group and Greig Guthrie at Vodafone Group for providing their insights
This article was taken from Issue 4 2024 of The Treasurer magazine. For more great insights, members can log in to view the full issue.
