An unusual recommendation to come out of FT Alphaville, perhaps. But the investment case looks to be compelling - at the moment.
Ironically, it is from the statement released by Lloyds on Saturday regarding its participation in the HM Treasury’s Asset Protection Scheme (emphasis ours):
Capital restructuring — replacement of existing preference shares
The Group has today agreed with HM Treasury that on implementation of the Asset Protection Scheme the £4 billion of preference shares HM Treasury holds (together with accrued dividends) will be replaced with new ordinary shares. Eligible Lloyds Banking Group plc ordinary shareholders (Shareholders) will be able to apply to subscribe for approximately £4 billion of new ordinary shares pro rata to their existing shareholdings at a fixed price of 38.43 pence per share. This represents an 8.5 per cent discount to the closing price on 6 March 2009. These new ordinary shares will be offered to Shareholders and new investors on the same basis as the Placing and Open Offer in November 2008. The ordinary share offer is fully underwritten by HM Treasury on substantially the same fee basis as the Placing and Open Offer conducted in November 2008. There will be an excess application facility as in November pursuant to which Shareholders may apply for additional new shares in the ordinary share offer. The proceeds of the issue will be used to redeem the preference shares held by HM Treasury.
And the current Lloyds share price? 6.2p higher at 49.9p.
So, what happens if Lloyds shareholders, or other “new” investors, take up the entitlement, as surely they would be mad not to. HM Treasury’s stake remains at 44 per cent and Lloyds remains a private company, in theory at least.
In fact, HMT’s stake would be diluted to 26% if all of the £4bn of prefs were taken up by shareholders, according to analysts.
Lloyds, of course, is also planning to issue billions of “B” shares to pay for its participation in the APS. However, these bits of paper only become Lloyds shares when - and if - the the price reaches 115p. And that’s all in the future.
But let’s assume the “B” shares convert. If shareholders have also taken up their rights over the £4bn of prefs, then HM Treasury’s holding would eventually emerge at 51 percent. Not a bad result, all things considered. And the bank would also have offloaded the majority of its toxic assets.
As things stand now, Lloyds is a “buy”.
Related link:
Asset Protection Scheme - agreement with Lloyds - HM Treasury
A deceitful deal for Lloyds Banking Group - FT Alphaville
