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Last Updated: Thursday, 24 February 2005, 23:58 GMT
Decision time for MMO2 investors
By Julian Knight
BBC News personal finance reporter

o2 shop
MMO2 plans to pay its first dividend later this year

More than a million small shareholders in mobile operator MMO2 have until 9 March to decide whether to sell their shares back to the company.

Under the offer, MMO2 shareholders can sell their shares to the company for 5p more than the price quoted on the London Stock exchange, without paying any dealing or stamp duty fees.

Seen by many as a generous offer, MMO2 is upfront about the fact that it is trying to reduce the number of small shareholders in a bid to cut costs.

To some however, the offer is seen as an attempt to bounce small shareholders out of the company and a blow to the 1980s dream of a share-owning democracy.

Farewell to MM

MMO2 is using the share offer as an opportunity to drop the MM from the company's name and it will in future be known as O2.

The offer has sparked anger on three fronts.

The MMO2 offer in detail
Shareholders can choose to sell their shares to MMO2 for 5p above the price on the London Stock Exchange
MMO2 will not charge a dealing fee and stamp duty will not be due on the sale
Registered shareholders who do not turn down MMO2's offer will be presumed to have agreed to sell
MMO2 wants to buy back 300 million shares - if more shares are offered to it, then individuals with the fewest number of shares will be bought out first
People who hold MMO2 shares in nominee accounts will have to become a registered shareholder to be able to take up the offer

Firstly, the offer to buy back shares is open only to registered shareholders, those whose names appear on the firm's register of shareholders.

As a result, anyone with MMO2 shares in a nominee account - an account held in the name of a stockbroker rather than an individual - will have to become a registered shareholder in order to take advantage of the offer.

The cost and time involved could deter many shareholders.

Shareholders who want to stay invested in the company can exchange each of their MMO2 shares for a new 02 share. However, any registered shareholder who does not respond to MMO2's offer will automatically be presumed to have agreed to sell.

Lastly, on a wider point, MMO2's offer has been seen as another nail in the coffin of the 1980's Thatcherite dream of wider share ownership.

High costs

MMO2 is no ordinary company.

It was de-merged from BT in 2001, with all BT shareholders receiving shares in MMO2.

This meant MMO2 inherited more than a million small BT shareholders, with 63% of its shareholders owning just 3.5% of the company.

At first, having such a large number of small shareholders did not pose a problem for the company.

Instead of simply selling out the shareholder they could have started to communicate with them by email instead of by mail, thereby reducing a lot of the cost
Angela Knight, APCIMS

But with the company set to pay its first dividend later this year, its multitude of shareholders could prove to be a problem.

"Having to pay a dividend to such a large number of shareholders will entail high costs," MMO2 spokesman Simon Gordon told BBC News.

"In the case of many small shareholders, the administration cost of paying a dividend will be higher than the dividend payment itself. This does not make sense. We need fewer shareholders," Mr Gordon added.

Level playing field

The high administrative costs of dividend payments explains why the MMO2 offer targets registered shareholders - these are the most expensive shareholders to pay dividends to.

MMO2 administers the payment of dividends to registered shareholders, while dividend payments to nominee accounts are administered by a stockbroker.

This has led to the group representing stockbrokers - or essentially non-registered shareholders - to cry foul.

MM02 share price

"I think it is unfair that there is not a level playing field allowing nominee account holders to take advantage of the offer as easily as registered shareholders," Angela Knight, chief executive of the Association of Private Client Investment Managers and Stockbrokers (APCIMS), told BBC News.

"Many of the small MMO2 shareholders hold their shares in a nominee account - they are in effect being stopped from taking advantage of this offer."

But it is MMO2's decision to automatically buy the shares of registered shareholders who do not respond to its offer that has proved to be most controversial.

"I really think they should have gone about this differently. For example, instead of simply selling out the shareholders they could have started to communicate with them by email instead of by mail, thereby reducing a lot of the cost," Ms Knight said.

MMO2's Mr Gordon said email was "impractical" as too few shareholders had computers.

Dream over?

Increasingly companies are choosing to take themselves private - de-list from the stock exchange - to avoid the high cost of fulfilling their duty to shareholders
Hilary Cook, Barclays

Some argue that selling the shares now does not make good financial sense for shareholders.

Hilary Cook, director of investment strategy at Barclays private clients, said MMO2's offer was "generous" but choosing to sell up could mean missing out on future share price growth.

"On the surface this is a good deal but MMO2 has been performing well and there have been takeover rumours in the past. As a result, we could see the firm's share price rise further."

Ms Cook added that MMO2's offer highlighted a general move away from the small shareholder.

"Having lots of small shareholders costs money, not just in terms of paying dividends but in the normal operation of the company.

"Increasingly companies are choosing to take themselves private - de-list from the stock exchange - to avoid the high cost of fulfilling their duty to shareholders."

As a result, Ms Cook said the stock market is now a long way away from the Thatcher dream of having tens of millions of private individuals owning shares.

"Almost as soon as the great privatisations of the 1980s were over we have seen a retreat from wider share ownership. MMO2's move marks yet another retreat."

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