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Hargreaves Lansdown: Should investors sell their TSB shares?

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Written by: Laith Khalaf, senior analyst, Hargreaves Lansdown
20/03/2015
Around 30 per cent of TSB’s floated shares went to retail investors, so many DIY investors will today be mulling over the takeover offer by Banco Sabadell, and the recent surge in TSB’s share price.   
‘It looks like TSB might soon become the bank that likes to say “si”. The deal is almost a dead cert to be accepted by shareholders. Half of them have effectively done so as Lloyds have given the nod, and they own 50 percent of the stock. It will take just one more solitary shareholder to approve the deal in order to carry it through.
 
However private investors still need to weigh up whether to sell now or hang on. For investors who bought at float, the bonus shares look like a carrot worth hanging on for. Later investors also stand to see a return from hanging on, if the deal goes through. All investors who hold on bear the risk that regulators decide to be party-poopers and block the deal. This looks unlikely to happen, but there could be considerable downside if it does.’
 
Should investors sell or hold on?
 
Those who invested in TSB at float are today sitting on a tidy 28 per cent profit in less than a year (based on the current selling price of £3.33 –it floated at £2.60). 
 
If the deal goes through at £3.40 a share, they stand to make a further 2 per cent from here, if they hold on. This is the difference in the takeover price of £3.40, and the current market price of £3.33. 
 
They also stand to make up to a further 5 per cent from the bonus shares, which were promised to investors at float. 
 
The shares were promised on the basis of 1 bonus share for each 20 ordinary shares bought in the float, subject to a maximum of 38 bonus shares per investor. These become fully payable in cash, if the deal goes through, at a price of £3.40 per share. So the maximum windfall from these shares would be £129.20.
 
This would bring the total return earned by a typical investor from float up to 37 per cent, if the deal goes through. Larger shareholders with more than 760 shares will get a lower total return, because they will hit the 38 bonus share cap.
 
Those who invested in TSB after the flotation won’t get bonus shares. They stand to make 2 per cent, from the difference in the takeover price of £3.40 and the current market price of £3.33, if they hold on and the deal goes through.
 
Will the deal go through?
 
Given that Lloyds own 50% of the shares and have approved the deal, it looks very likely to be accepted by the majority of shareholders.
 
However there is still a risk that either European financial regulator or the Prudential Regulation Authority blocks the deal.  This risk looks remote, but the market is clearly still wary, which explains why the stock is trading as far below the offer price as it is.
 
Perhaps the scale of the downside is a consideration here. Prior to the announcement of the takeover move, the shares were trading at £2.64. If the deal falls through and the share price reverts to this level, that would mean a 20 per cent loss from today’s valuation.
 
Conclusion
 
The decision for investors is now finely balanced.  The likelihood is they will be rewarded for hanging on, particularly those who invested at float and can pick up bonus shares. However there is a small risk the deal could fall through, which could result in a substantial loss based on the current valuation.
 
Investors should definitely consider their options at this juncture, and make sure they have all the facts in front of them before making a decision.
 

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