Arthur Buchner: Head of proprietary trading, Nedbank Equity Capital

MONEYWEB, Belinda Anderson, 22 November 2005

Investec’s odd-lot offer – an oops?

MONEYWEB: Also in the studio though is Arthur Buchner from Nedbank Equity Capital. Arthur, thanks so much for coming into the studio. We wanted to speak about the Investec odd-lot offer. On the 20th of October it said it’s trying to reduce its administrative costs, but it seems to have miscalculated a bit. Just firstly, what is an odd-lot offer?

ARTHUR BUCHNER: Well, first of all, most companies nowadays find it quite onerous to send out results, packages, to every single shareholder that’s invested in the company, and there are a large number of shareholders who own between one and a hundred shares. So what the companies have tried to do is they have actually tried to take those shareholders out of the share register, saving them on administration and administration costs – and they do that by an odd-lot offer. And we have had about 30 or 40 of the top hundred companies actually come out and announce odd-lot offers. The first one in fact was AngloGold about four years ago, then over time we have had a number that have come out. The funny thing with the Investec one is, as David says, you know, it’s “Let’s square up our books and let’s go home”. Everyone is looking for value at the moment in the market, and it just so happens that the punters spotted value in Investec. And what Investec have gone and done is, they have offered – they have got the two shares listed, they’ve got the INLs and the INPs, the INLs being the South African-listed stock and the INPs being the London-listed. They offered R284 for every share that you own under 100 for the INPs, and then for INLs they offered R277. However, the share price was trading at R268 and R270 respectively, hence the offer was at a premium to the market. So let’s say you are a portfolio manager managing 40 or 50 clients, you say to yourself, well, I’m going to buy 99 shares of Investec Ls and Investec Ps. At the end of the day I’m going to buy them at R268, I’m going to sell them at R277 or R284 respectively, and I’m going to make myself R10 on 99 shares. And that’s what has effectively happened and it hasn’t only been 40 individuals, we calculated 800 to 900 individuals have bought 99 shares in the company.

MONEYWEB: So there are a lot of clever people out there who saw the opportunity and have made some cash.

ARTHUR BUCHNER: Well, they haven’t made cash yet – and that’s the announcement that came out this morning. But as with anything on the market, the market is a fantastic web where everyone finds out what’s going on, and I think a lot of people have put this trade on. Investec have looked at it and they have said, “Well, how much is it going to cost us?” At the end of the day if you have 800 people buying stock, 99 shares at a R10 discount, you’ve got R1 000 profit effectively or R1 000 that Investec is going to have to pay out, multiplied by the 800 people, you’re looking at R800 000 – it can even be more, because this offer still extends till Friday. So they have now come out and said, “Hold on a second, if there is any more untoward trading in our share, we may reconsider and we may actually withdraw it”. So they haven’t said they’re going to withdraw it – they basically said that they may withdraw it.

MONEYWEB: And was there anymore untoward trade after the cautionary?

ARTHUR BUCHNER: There were of course people trading today in the stock. There is one issue that Investec haven’t broached – and that is for me to go an buy 99 shares, I’ve had to pay brokerage first of all, and it’s about a R25 000 purchase, I’ve had to pay UST of 25 basis points, and at the end of the day that could have cost R150 per person that’s buying. So the person’s not making R1 000, he’s actually making R850. Now if Investec withdraw the offer, those people have effectively lost R150. They, I think, have recourse to the fact that you announce the deal, then suddenly you say, “Well, hold on a second, we have made an error, we’re going to withdraw it at no cost to ourselves” – and I think that’s where Investec may come a little bit unstuck.

MONEYWEB: What should it have done to prevent this?

ARTHUR BUCHNER: Well, first of all they shouldn’t have offered that large a premium. They offered 5% above the market. The second thing is they could have done it and said, “We are making the odd-lot offer on Thursday and everyone who is registered by Friday would get their purchase price at R277”. But what Investec have done is they have given almost two weeks for people to trade in it. Another way of doing it is to say everyone who was registered as of last week Friday will be eligible for it – they could have backdated it. The other thing is that this is a classic historical example, because AngloGold did exactly the same thing.

MONEYWEB: So it’s happened before and we didn’t learn from our mistakes?

ARTHUR BUCHNER: Correct. The only difference with AngloGold is that you only had to buy one share, and AngloGold gave you 99 shares at a discount. So they haven’t learnt from history, and I don’t think they’re going to be able to step out of it.

MONEYWEB: What does this say? Surely this is embarrassing for Investec? They are corporate financiers, they’re good at what they do and they make a mistake like this!

ARTHUR BUCHNER: Well, I think Merrill Lynch are advising them. It could be bad for Merrill Lynch, not necessarily for Investec. I think they were trying to do a good thing, they were trying to give the odd-lot holders – and I believe that there are about 12 000 of those odd-lot holders holding between 100 and 500 shares, you can’t see who holds the other 100 – but they tried to give them a better offer so that everyone accepted it, and at the end of the day they just miscalculated the ability of the little portfolio manager out there trying to make money.

MONEYWEB: Indeed. Arthur Buchner, the head of proprietary trading at Nedbank Equity Capital. David, you have got a grin on your face.

DAVID SHAPIRO: Well, I have to, because I think the market is so smart. They never miss a trick and every time you think you’re going to beat them, there’s always some smart-ass trader there who is going to take you. I remember so well the AngloGold deal which Arthur alluded to, where you could up your odd-lot to 100 and boy, did it cost them money. But that’s the market – and that’s how clever the market is.

MONEYWEB: I think in the AngloGold issue, it cost them over R10m in fact, because there was a huge discount. This we don’t think is going to cost more than R1m to Investec.

DAVID SHAPIRO: Yes, I just want to say one thing about that, that in the past – when I say “in the past”, on an open-cry market – when you used to buy under 100 shares, you used to buy them at a premium or sell them a discount. It was an odd-lot deal. But today the screen allows you to buy threes and fours and five shares, so you are never going to eradicate those shares, and where Investec is quite an expensive share to buy – it’s over R267 a share – yes, there are going to be people who are quite happy to buy 50s and 30s and 40s. So you might take them out for a bit, but I think they will start to come back again in the expensive shares.

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