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PRG - Programmed Maintenance Services

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PRG Arbitrage


Purchase price $2.96

Sale price $2.42 Approx. end Oct.

Expected franked Dividend $0.60 Approx. end of Oct.

Expected franking Credit $0.257 Approx. Aug 2018

Expected tax shield (2.96-2.42) =$0.54*Capital Gains tax rate. Approx. Aug 2018.


I have quite a few purchases that will be under the 12month holding period for CGT discount, making a CGT tax shield attractive, so I have implemented to offset those purchases. If acquisition doesn’t go ahead Capital gain/loss between new and non-discount parcels should just about net out to zero.



Risk.

Takeover doesn’t go ahead (~20%) – price falls by ~$1.20

Franking Balance not utilised (~20%) - $0.51 of tax benefit not realised.

Settlement date blows out tying up money for longer.


Reward

$0.06 positive cash flow in October 2017.

$0.51 reduction in tax payable Aug 2018.
 

Where are they going to get the cash to pay out the 60c div?
Nothing in the deal docs suggests persol will loan them the cash pre deal closure. Have seen money from acquirer to target to pay business costs but not divs
 
skyQuake said:
Where are they going to get the cash to pay out the 60c div?
Nothing in the deal docs suggests persol will loan them the cash pre deal closure. Have seen money from acquirer to target to pay business costs but not divs
Click to expand...

Declare the dividend but don't pay it until after the deal is closed. Once it's declared, s/holders become unsecured creditors (or the dividend becomes a debt) whether or not the deal goes through.

More likely it will form part of the scheme and the dividend will be declared concurrently with the closure of the deal.
 
skyQuake said:
Where are they going to get the cash to pay out the 60c div?
Click to expand...

I don't know - It's a risk.

Pretty strong incentive to extract the value of the franking credit balance. Short term credit is not exactly a scarce resource. It doesn't have to come from Persol, though they would probably be the cheapest source of finance. I guessed the risk of not obtaining finance at ~20%

Persol should be indifferent as to wether it pays equity holders $3.02 or equity holders $2.42 and debt of another $0.60 if they don't themselve fund it.
 

It would seem prg don't have enough retained earnings to utilise all their franking credits. They may be able to come to some agreement with the ato, but too many question marks and now too marginal (for my liking) with increased uncertainty as to size of dividend. I'm going to chastise myself for missing obvious and sell majority of arbitrage position.
 
On November 6th, 2017, Programmed Maintenance Services Limited (PRG) was removed from the ASX's Official List in accordance with Listing Rule 17.11, following implementation of the scheme of arrangement whereby Autalent Solutions Pty Ltd, a wholly owned subsidiary of PERSOL HOLDINGS CO., LTD acquired all of the Company's securities.
 
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