Reuters in pounds 1.5bn shareholder handout

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The Independent Online
Reuters finally found a home for its growing cash pile yesterday with an innovative scheme to return pounds 1.5bn to its shareholders. Peter Thal Larsen finds that a whole host of other companies are waiting to follow suit in swapping debt for equity.

The financial information provider is effectively bidding for itself. A new holding company - Reuters Group plc - is to offer 13 new shares and pounds 13.60 in cash for every 15 existing Reuters shares. The move will return a total of pounds 1.5bn to shareholders, leaving the company with net debt on its balance sheet for the first time since 1981.

Rob Rowley, finance director, said the move would improve the company's return on capital. "When you have cash earning a 5 per cent return and shareholders looking for 10 per cent you have a bit of a drag on your performance," he explained.

Mr Rowley said the plan would cost Reuters about pounds 30m in one-off tax and other costs, but avoided the huge Advance Corporation Tax (ACT) bill that share buybacks normally incur. "If we had not done this the scale of the deal would have been limited to half the size," he said. Although Gordon Brown, the Chancellor, announced the abolition of ACT last month, it will not be fully phased out until 1999.

Investors have long criticised Reuters for hoarding cash. An attempt to return pounds 613m to shareholders last year was thwarted when the Inland Revenue changed the rules on tax credits attached to special dividends. However, Reuters said the new scheme had full approved Inland Revenue approval.

The announcement went down well with investors, who pushed Reuters shares up 30.5p to 710p. "It's good news," said an analyst. "It should improve their return on capital."

The move is expected to release a wave of capital from other companies eager to hand back cash to shareholders. SBC Warburg Dillon Read, the merchant bank which designed the Reuters scheme, is talking to at least another six companies with similar plans. "The pipeline is fuller now than it has ever been," said corporate financier Max Ziff.

Warburgs calculates that over pounds 9.5bn has been returned to shareholders by companies since October 1996. But that's just a small proportion of the amounts companies could hand back. "UK plc is undergeared compared with the rest of the world," said Mark Tinker, UK equity strategist at investment bank UBS.

He calculates that if British companies took on the same level of debt as companies elsewhere, they would be able to buy back shares worth pounds 100bn. Cash-rich companies like Marks & Spencer and Bass are prime candidates to take on more debt.

Mr Tinker said the abolition of dividend tax credits in July's budget had reduced the attraction of dividends for investors, making it easier for companies to buy back shares. However, the continued existence of ACT - which requires companies to pay tax up front on any money they pay to shareholders -- made large buybacks impossible, prompting groups like Reuters to devise complex schemes that avoided ACT.

Now that ACT is to be abolished, however, companies will be free to buy back as many shares as they like. Indeed, Reuters announced yesterday that, in addition to the pounds 1.5bn pay out, it would buy back shares worth pounds 200m during 1998.