Preference Issue Behind U.E.B. Move?

Press, Volume CVIII, Issue 31726, 9 July 1968, Page 16

Preference Issue Behind U.E.B. Move?

A placement by U.E.B. Industries, Ltd, Auckland, of its 400,000 unissued $2 preference shares appears to be the reason for the proposed increase in preference dividend from SJ--16} per cent cumulative participating to 6}-7} per cent, according to financial sources in Auckland.

The proposal has met some opposition from ordinary shareholders, with a Wellington shareholder seeking proxies for next Friday’s annual meeting.

Tn the annua! report, directors said the reason for the proposed increase was that since the introduction of dividend tax the market value of the preference shares had fallen below par. But in a statement published as an advertisement today, they say that the company required extra working capital and that this could be found by issuing the remaining $BOO,OOO of preference capital. The statement does not say this in so many words, but it appears that the shares would be placed with institutions such as the life offices. Higher Yields As these can buy good preference shares in the market below par to give them a return of about 6J per cent, such organisations would not be interested in buying U.E.B preferences for a yield of 6j per cent. Moreover, as the tax

| changes introduced in last year’s budget meant that in ’two years the life offices I would pay the same rate of > tax on dividends as they paid i on interest, they have bought debentures rather than preference shares : n the last few years : Thus, to be able to issue its l oreference shares. U.E.B. had f to make the terms more ’ attractive. Issue At Discount Legally, it could issue them at a discount, thus increasing the yield, but this is probably not feasible for practicable reasons. It could also style the 400,000 unissued preference shares B preference shares and give them a higher interest rate. This would save the extra $12,000 involved in also upgrading the dividend on the issued shares. However, with the institu-

tions no longer very interested in preference shares, there is doubt whether this would have been a sufficient incentive for the life offices, which probably already held the great bulk of the issued preference shares. By also raising the dividend on existing holdings, U.E.B. is making the placement more attractive, financial opinion holds. Even with the dividend, at 7j per cent, an issue of the remaining preference shares would be cheaper long-term than another issue of ordina ries.

With shareholders’ equity at about 50 per cent, it appears doubtful whether the company could at this stage make another debenture issue —still the cheapest form ol company finance. Ordinary Shares The financial opinion is that to raise $BOO,OOO by way of an ordinary issue would require a ratio of about one for 20 Issued at a premium of, say 25c a 50c share, these shares would yield 7.3 per cent and thus cost the company about as much to service as a preference issue at 7j per cent Moreover, future bonus issues and/or dividend increases would further increase the cost of an ordinary issue, quite apart from issue expenses. With plenty of sellers still in the market, it was doubtful whether yet another cash issue by U.E.B. would be greeted with much enthusiasm.

And, as the company obviously needed more working capital to finance its rising turnover, the preference move did not appear to be such a bad one, although it must be regretted that the reason for it was not given straight away, the financial sources said.