Corporate actions can be tough decisions for retail investors, as the decision to participate in share purchase plans, share buy backs or rights entitlement offers can cause undue investing stress, leading to poor decision making.
From the reporting season that was, shareholders of Insurance Australia Group Ltd (ASX: IAG) and Telstra Corporation Limited (ASX: TLS) are left deciding whether they should sell shares in the respective off-market share buy backs of both companies.
Similarly, small parcel shareholders of South32 Ltd (ASX: S32) are left making the choice of whether they should retain or sell their small parcel of shares (worth less than $500).
Finally, shareholders of Metcash Limited (ASX: MTS) are left with arguably the toughest choice of them all – whether they should participate in Metcash's share purchase plan (SPP) or not.
About the Metcash SPP
On 24 August, Metcash announced the acquisition of the Home Timber and Hardware Group from Woolworths Limited (ASX: WOW) for $165 million. The acquisition will be funded through a combination of equity and debt comprising an institutional share placement of $80 million (already completed) and $85 million to be drawn from existing debt facilities.
In addition, shareholders who were on the register as at 7PM on 23 August 2016 are entitled to participate in Metcash's $20 million SPP for the purposes of reducing debt and strengthening Metcash's balance sheet.
Offer details
Eligible shareholders are entitled to purchase new shares in Metcash at the lesser of $2 per share (the same price as the institutional placement) or the volume weighted average price between 12 September 2016 and 16 September 2016, after a 2.5% discount. The maximum amount is $10,000 per eligible shareholding, subject to scale-back.
SPP shares will be issued on 28 September.
Arbitrage opportunity?
At Wednesday's closing price of $2.14, eligible shareholders are likely to acquire the SPP shares at $2 per share, implying a 7% return on the SPP price if prices persist.
However, investors should note that this return isn't guaranteed given the potential for Metcash's share price to fluctuate following the offer closing date (16 September) and SPP shares issue date (28 September). Furthermore, the "winner's curse" hypothesis suggests that even if the current Metcash price persists, the likelihood of a scale-back would increase, meaning investors are not rewarded as expected for taking on the additional risk.
Accordingly, eligible investors shouldn't participate in the offer simply to turn a quick profit.
Foolish takeaway
Corporate actions such as share purchase plans and share buy backs should never be tough decisions for eligible investors, given the fundamentals of a company don't drastically change by these actions. Irrespective of whether you buy more shares in Metcash or not, its fundamental business of supermarket and hardware retailing should remain the same (albeit slightly expanded).
This means eligible investors must stand back and ask themselves the following: outside of the SPP, would you buy more shares in Metcash because of the HTHG acquisition?
If the answer is yes, than investors should take advantage of the discount on offer and participate in the SPP. If, however, the answer is no, then the fact that this is a corporate action with the potential to make a quick profit should have no bearing on your investment decision. After all, it's rather foolish (without the capital F) to jump off a cliff just because someone tells you to jump.
