Derek Pain: Small shareholders will be the losers in RBS consolidation

No Pain, No Gain
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The Independent Online

Share consolidations have much to commend them – but sometimes they can be disastrous for small shareholders. The Royal Bank of Scotland (RBS) is the latest to indulge in a revamp that will transform its low-price shares – more or less in the penny-dreadful category – to rather more heavyweight components of the stock market.

This month, shareholders will be able to vote on the consolidation which will switch every 10 shares into just one. What amounts to a cosmetic exercise will almost certainly be approved. As a result, investors should have a share worth, say 240p, instead of 10, each changing hands at around 24p. Their percentage interest, including the Government's 82 per cent, will be unchanged. The switch may even provoke a modest price uplift.

But there will be losers. Those with 10 or less shares will be wiped out. They, and investors who have shares outside the range of 10, can reclaim their cash entitlements, which will not be much above 200p. If they don't, the money goes to charity. Their consolation, besides any capital gains tax consideration, is that it would not be cost effective to sell through the stock market. Before calamity overwhelmed RBS, the shares were much higher than the present, depressed level. Consequently, other investors who ploughed modest amounts into the stock will still be holding so few shares that it will be unrewarding to sell.

RBS makes the usual noises about the motives for consolidation. The shares will be given a value "more appropriate" to a group its size (capitalisation is £14.6bn) and will provide a more consistent valuation and reduce volatility. It will, I imagine, also cut the cost of maintaining the share register as some 60 billion shares will slip to around six billion.

I would not be surprised to see Lloyds Banking Group, the nation's other bank with a Government involvement, adopting the same capital route. Both banks were laid low by the financial crisis and their recovery is slow and painful. RBS suffered from ill-judged expansion and investments, whereas most of Lloyds difficulties stem from the Government-inspired rescue of HBOS, a former mutual taking in the Halifax building society.

Because of Halifax, which offered shares based on the value of saving accounts, Lloyds, which only five years go enjoyed a share price of more than 500p compared with around 33p these days, probably has a far longer list than RBS of really tiny shareholders.

I would not buy either share. Any long-termer who is already lumbered should hold on and hope for the best.

Consolidations from a company's viewpoint have much to commend them.

Besides the perceived cosmetic implications, a low price share has disadvantages, including presenting cash-raising difficulties if it sinks below par. The nominal value of RBS shares is 25p, although after the upgrading it will be 100p.

But in some cases such manoeuvres can be upsetting for shareholders. It is not at all unknown for a company over the years to indulge in a number of consolidations, resulting in the total wipe-out of shareholdings.

I am not, of course, suggesting RBS will go along such a path, but it has happened among the small cap fraternity.

I have recorded how consolidations as well as a sinking share price helped to reduce a no pain, no gain portfolio investment of £5,000 to a mere £200. I can think of a number of examples where once high-flying shares have slumped due to poor management, changed circumstances and the inevitable consolidations.

The danger is that share revamps can become an addictive habit. And it only takes a few before small shareholders, who may have invested a couple of thousand pounds some years earlier, are, in effect, eliminated or left with a few near worthless shares.

Sometimes, as with RBS, charity is the beneficiary, on other occasions it is the company which scores as the tiny stakes are lumped together and, to add insult to injury, sold in the stock market to enhance the coffers of the malfunctioning business.

So a company may, for a variety of reasons, advocate the merits of share revamps, although small shareholders may believe that they represent at best a mixed blessing.

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