Super funds and other big Woodside shareholders knew that there was a trade-off involved in the group's plan to assist Shell’s exit from its register with a $US2.7 billion selective share buyback.
A governance and value issue was obvious, because ordinary shareholders are meant to be treated equally. The selective buyback would have used up almost $1 billion of dividend franking credits to give Shell a deal and an after-tax sale price that others shareholders were not being offered.
The selective buyback would, however, have also all but eliminated a share overhang that has existed since November 2010, when Shell cut its stake in Woodside by 10 percentage points to 24.3 per cent.
Shell placed a 9.5 per cent stake in Woodside in mid June in an auction that was well supported by institutions. It will be left with about 13.6 per cent of Woodside if the Australian company's buyback of another 9.5 per cent stake is voted down by shareholders at a meeting in Perth on Friday as expected.
It is not likely to sit on the holding for long. Other share sale options exist.
A bid by Shell to take over Woodside was blocked by the Howard government in 2001. Its sell-down in 2010 signalled that it wanted a full exit, and the two-pronged deal that Woodside announced in mid-June would have pretty much achieved it, by cutting Shell's holding to about 4.5 per cent.
The selective buyback was controversial from the day it was announced, however.
The Council of Superannuation Investors told its industry fund members that the governance issue was real, but that each fund needed to assess the trade-off. Private sector funds weighed the same issues, and the result was mixed. Some funds supported the buyback, some did not.
As Woodside revealed on Thursday morning, however, enough funds are opposed to the buyback to sink it.
Woodside needs a 75 per cent "yes" vote to get the buyback up, and its audit of proxy votes that account for about 59 per cent of its shares shows a "yes" vote of only 71.3 per cent. Australian institutions that can use franking credits to reduce their tax payments are believed to be voting heavily against the buyback, Shell cannot vote its 13.6 cent stake, and the number of new votes cast at the meeting on Friday will be small.
The fact that Woodside has decided to reveal the proxy voting numbers before the meeting does open up some uncertainty about the final vote, but it is not likely to be decisive.
Proxy votes can be changed right up until they are cast at the meeting. It is possible therefore that Woodside’s announcement that proxies are running against the buyback will do what political polls that predict election landslides do, and persuade some voters to change their mind.
The big shareholders considered the trade-offs before they voted, however, and are unlikely to change their mind in large enough numbers to get the "yes" vote up to 75 per cent.
From Woodside’s perspective meanwhile, the "no" vote that the proxy audit uncovered is big enough to make it a market-sensitive matter under Australia's continuous disclosure regime. It probably needed to be announced, even if it does affect the final vote.
If the buyback is voted down on Friday as the proxy numbers suggest, equal treatment will have beaten strategic expedience.
The buyback was priced at a 14 per cent discount to Woodside’s share price before the buyback announcement. It would have ended the Shell shareholding overhang to all intents and purposes, and by shrinking issued capital would have boosted Woodside’s earnings share and dividend by 6 per cent.
Enough shareholders with enough shares to vote down the buyback appear to believe however that the franking credits Woodside wants to pass on to Shell are worth more kept inside Woodside on behalf of all shareholders, and that a selective buyback of this size would set an unwelcome precedent.
Shell will probably find another way to sell. Another placement is possible, for example, after investors have digested the 9.5 per cent, $3.2 billion placement that occurred last month. It was 1.8 times over-subscribed, so the wait shouldn't be too long.
Woodside might assist by announcing an across-the-board buyback. Shell could sell into that alongside Woodside's other shareholders, and could also sell on-market to investors buying into Woodside to participate in the pro-rata buyback.
