RM, a provider of educational products and services to schools, has been through some troubled times of late. Revenue has been falling and is forecast to fall further after they made the courageous, if long overdue, decision to stop producing PCs. In addition there have been a number of changes among the directors in the last couple of years.
But the company has been generating cash, and now has a healthy cash balance (£63m in the last accounts) so it has decided to return £15 million to shareholders via a special dividend. That’s equivalent to 16p per share and is also equal to 12.2% of the market capitalisation before the announcement according to the company’s calculation. One cannot argue with the wisdom of doing so.
However, this special dividend is linked (and being voted on in a single resolution), to a share consolidation. The effect of the consolidation “will be to reduce the number of shares in issue by approximately the same percentage” according to the notice issued to shareholders for the AGM on this matter, which appears to be correct.
But share consolidations rarely make any sense because at best it fools only unsophisticated investors into believing the share price and its underlying value has remained unchanged. It’s also questionable because the value of the shares of a trading company is rarely dependent solely on the cash or assets on the balance sheet. Large cash holdings will certainly have some impact on the valuation, but more likely the future prospects in terms of earnings or dividends will have more impact
In addition there is the question of whether the share options that have been granted in the past should be adjusted to take account of the consolidation. Many people argue they should be in such circumstances so as to reflect the increased value of each share under option. But on a quick review of the AGM notice and Annual Report I can see no mention of any such adjustment.
Now if shareholders wish to go to the AGM and ask questions or complain about this matter, the company has at least moved the time of the AGM to 11.30 on the 19th March whereas it was set at 9.00 a.m. in the previous two years. Quite an unreasonable time to fix for AGMs in any location but particularly so in the company’s offices west of London – as I complained at those meetings.
But if you wish to support the special dividend but oppose the share consolidation, you cannot because they are combined in one resolution. So bad corporate practice continues as combining resolutions in this matter is never a good idea. There should have been two separate resolutions with one dependent on the passing of the other.
Shareholders may therefore wish to vote against the combined resolution and encourage the company to do it correctly.