Market continues to weaken

Press, 6 November 1978, Page 22

Market continues to weaken

Commercial

ADRIAN BROKKING,

commercial editor

By

The New Zealand sharemarket continued last week its steady decline of the past three months, but staged a, modest rally on Friday al-; though still well down on. the week. In fact the market weakened on the first four days. A wag of my acquaintance asserts that it fell each day because of a major election speech the da\ before, and :that it rose on Friday as : there was no speech on Thursday. Whatever you want to think of that, the election speeches were rather depr- : essing — at least, I could fiitd no joy in them. Trading during the week; hvas moderately active, but; mixed and unexciting. But right after the close i of trading on Friday L. D. Nathan and Company; dropped a bombshell with 1 the announcement that it was bidding to take over; Woolworths New Zealand. Woolworths shares gained; 12c in the last two weeks,! but in this case this does! | not necessarily reflect in-! ! sider trading. After all, the [company announced rather a good year — with a hefty dividend increase — which ; alone justifies the rise in the price of the shares.

In any case, Nathans did Ithe right thing when they timed the announcement for .the week-end: it will make (for more orderly marketing I todaj. Any prediction regarding the outcome of this bid would be premature, until more is known. The offer price is obviously a good one, but Woolworths is trading well just now. and the directors might well argue that prospects are such that shareholders can do better In addition, there is the large interest of , the Australian . Woolworth i group, which amounts to labout 40 per cent of the capital of the New Zealand | company. It would appear that the bid can only succeed if the directors of Woolworths I recommend it. I The other interesting move during the week was ithe planned capital reconstruction of Radio Avon, I with the object of enabling Ithe company to pay tax-free i dividends. Because Avon is a young 'company and has not been yet able to build up capital reserves it cannot pay taxfree dividends from' that source — so it intends toi i repay some capital and

replenish the amount from revenue reserves. in law and logic there is no difference — for this purpose — between ordinary capital and share premium reserve whereas creditors of the company are protected by the creation of the capital replacement fund. At the same time this fund is available for bonus 'issues, so that when the capita! repayments have been effected, shareholders will have double the number of shares of half the nominal value ach. An ingenious scheme, but one wonders what the taxman will think of it all — one should not be surprised if this kind of scheme were sooner or later prohibited by j legislation. While we are on this topic of tax-free dividends, the (last time I wrote about this 1 was a bit careless. Unfortunately, because of the journalists’ strike I could not put the record right! ■straight away. By talking in the same | breath of realised capital! profits and share premium account I lumped them all together, but of course,' there is quite a difference. Dividends may be paid) from profits whether they! are revenue or capital i profits. Such payments need no approval from Supreme Court or Inland Revenue department. But distributions from share premium account are a return of capital. An important reason, and one I did not mention in the previous article, why trustees should be able to elect to have dividends paid from revenue is that otherwise they would have to treat it as capital received for residuary beneficiaries and cannot treat it as income for the beneficiary entitled to the income and who therefore needs this protection. 1 had a nice letter on this topic from a well-known lawyer who does not wish to be named but to whom I am obliged. j