Page last updated at 23:00 GMT, Tuesday, 2 June 2009 00:00 UK

Fair share for Lloyds investors?

Money Talk
By Gavin Oldham
The Share Centre

Gavin Oldham
Gavin Oldham is chief executive of The Share Centre

The Lloyds Banking Group entitlement offer draws to a close at the end of this week, aiming to raise £4bn from current shareholders to redeem the government's preference shares.

This should enable Lloyds to start paying dividends to shareholders again, and redemption of the preference shares will also reduce Lloyd's annual interest bill by £480m.

Bearing in mind that the government already owns 43% of the bank's ordinary shares, that means £2.3bn will be raised from other shareholders.

If you are a personal shareholder with the average holding of 550 Lloyds shares, you will have received a bulky document offering you 341 new shares at 38.43p each: a cost of £131.05.

As a registered shareholder you'll have to pay up by Friday, 5 June if you want to take up the shares, and probably a couple of days earlier if your shares are held in a broker's nominee account.

How it works

An entitlement offer is a bit like a rights issue, except that you cannot sell your nil-paid new shares into the market; your only choice is whether to pay up the call or not.

The Lloyds offer is well constructed and should help to move the bank away from the grip of government

The new shares, which are not paid for by existing shareholders, will be sold in bulk early next week.

Any premium the company achieves over its 38.43p call will be distributed pro-rata to the shareholders who did not pay up, after administrative expenses have been deducted.

A personal shareholder with the average holding might therefore see a cheque back for about £100, dependent on the market price next week.

So should you pay up, or do nothing and wait for a cheque in the post?

The main question is what you want from your Lloyds shares in future.

If you want to share in its dividend - once it restarts - to the same extent as in the past, and you feel satisfied that Lloyds is over the worst, then you should pay up.

Otherwise your dividend will be diluted by 38% compared to shareholders who have paid up. At The Share Centre we believe that current shareholders should take this course of action.


Those who wait for a cheque may be disappointed if they have read earlier media reports on the issue, which suggested that the average pay-out could be £300.

We do not think the cheque will be anywhere near this amount at current market levels.

It is also worth considering that the dilution effect of not paying calls when share prices are low is always much more damaging to your future returns than when share prices are high.

We may see more entitlement offers like this in future, since the shortening of the rights issue response period from three weeks to 10 business days earlier this year.

This has reduced the period during which nil-paid rights could be traded significantly, and many companies might consider that it is simpler to just sell off any new shares not taken up - the "rump" - after the call by using an entitlement offer.

The problem is that whereas in rights issues, personal investors could buy nil-paid rights in the market if they want a new holding or to increase their existing shareholding, it may be very difficult for them to buy shares in the "rump" sale after an entitlement offer: this is normally an institutions-only process.

We fear that the proportion of shares held by personal investors will reduce even more sharply unless special arrangements are included to allow access, possibly through placing internet orders.

Nevertheless, the Lloyds offer is well constructed and should help to move the bank away from the grip of government.

With £260bn of their assets now insured against losses and their capital position likely to be strengthened by further disposals, Lloyds should be able to start building on its strong competitive position in the UK market for the future.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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