By MARY HOLM
Q. I read in the Herald that Fletcher Paper has been sold for $2.50 a share.
Why, then, is the share trading at around $2.30 on the NZ Stock Exchange? Isn't there 20c still to be made? Do you call the difference arbitrage?
It seems to me that there is about 7 to 8 per cent to be made. Not bad, I would have thought, for a short-term investment.
A. You're probably right. There's probably a buck or two to be made out of the situation. But only probably.
Let's look at the 20c difference. Bruce Robertson, a senior adviser at JB Were, reckons about 8c to 10c of it is holding costs.
By the time Norske Skog's friendly bid for Fletcher Paper is okayed by the shareholders of Fletcher Paper and Fletcher Challenge and gets various other approvals, shareholders probably won't get their $2.50 until early August, says Mr Robertson.
If you buy now, you're tying up your money, earning no interest, for four months.
While that might not cost you 10c per $2.30, it could cost people who borrow to make a share purchase more than that.
The way the market works, different people's costs are averaged out.
Also, says Mr Robertson, "there's always a little bit of uncertainty - there's a small chance the deal could fall over."
The fact that people are willing to sell Fletcher Paper now for around $2.30 suggests that they are making an allowance for that. It's the old bird-in-the-hand argument.
Then you have to take brokerage into account. There won't be any at the exit end. The company will just mail you a cheque.
But when you buy you'll have to pay brokerage of anything up to 2 per cent or more - although these days many brokers will charge you 1 per cent. And you can probably do better still if you buy a large number of shares or buy via the internet.
Another point: if Inland Revenue was to have a little chat with you about your purchase, you would be hard-pressed to argue your way out of paying tax on your capital gain.
So where are you now with your 20c a share? If:
* You can buy the shares with money that you're not paying high interest to borrow, or that wouldn't otherwise be earning you much.
* You accept the slight risk that the deal could fall through.
* You pay low brokerage, and allow for tax on your gain ... then it might be worth splashing out on Fletcher Paper.
Your profits won't be huge, though, unless you invest lots.
The only time you can make big money in a situation like this is when you take considerable risks.
Sellers aren't stupid. They're not going to give up their shares for much less than the price they expect to get for them in the near future - unless they think there's a good chance they won't actually get that price.
It's worth keeping in mind, though, that different people have different tolerance for risk.
Also, some people sell, even at a lousy price, because they have something better to do with their money.
You ask whether this is an arbitrage situation. Well, sort of.
A more typical example of arbitrage is when identical items, such as shares, are bought and sold in different markets, perhaps in different countries.
An arbitrageur buys in the cheaper market and sells in the dearer one. When enough arbitrageurs do that, their demand pushes up the price in the cheaper market. And the glut from all their selling in the dearer market pushes that price down.
The result: the prices come together. That's arbitrage.
It's not fashionable these days to praise market forces. But they can do some pretty clever things.
Q. Good points well made in response to your correspondent considering moving to Oamaru (Money Matters, April 1). But your cartoon was too hard on the lawyers. (As you will note from my address, I am one).
On the sale of an Auckland house at $280,000, a real estate firm will charge, on average, about $11,200, or 4 per cent plus GST.
The legal fee for that transaction would be about $400-$500 plus GST, and disbursements (payments on behalf of the client) of about $90 would be incurred.
And guess who is responsible for the completion of the transaction, and accounting to the seller and their mortgagee for the sale proceeds?
Conveyancing is extremely competitive. Quite a few of my conveyancing colleagues would charge less than $400.
I can take a good-humoured dig, but the cartoon was misleading about lawyers' conveyancing charges and was unfair.
Also, we in the suburbs do not always wear neck attire and suits!
Should you ever think of moving to Oamaru or elsewhere, do ring me for an estimate for the legal work - the fee will not fill a suitcase.
A. Surely lawyers, of all people, should appreciate the dangers of leaping to conclusions.
Just because the lawyer in the picture in question held a suitcase with two dollar bills hanging out of it, doesn't mean it was full of such filthy lucre.
In fact, its contents were much more benign, as Herald artist Gary Roberts reveals today.
On reading your letter, Roberts looked into suing you for libel. But the legal fees would have been too high.
(I was planning to have lunch with a lawyer friend today. Wonder if she'll still talk to me?)
Q. We have a debt burden from a past business venture of $80,000 (my father is guarantor). We have a $180,000 house with a $129,000 mortgage.
Should we sell our house and pay $50,000 off our business debt and rent a house, or should we stay put and pay off extra principal from earnings?
Our joint incomes are $5500 net monthly. The only other debt we have is credit card debt of $5000.
We do like the stability of a house - we have one young child.
Hope you can help us with this dilemma.
A. Don't panic. A debt like that certainly is a burden, but one that you should be able to cope with, given your pretty high incomes.
I don't think you should sell your house.
It can be argued that, in the long run, you might be better off renting and investing elsewhere (in your case the "investing" would be repaying the debt), rather than owning a house.
But it's just as easy to argue the other way. It all depends on the assumptions you make about changes in house prices, rents, investment returns and so on.
You already have a house so you would have to cover the expenses of selling it. And, perhaps most importantly, you like owning the house. Keep doing so.
Then what to do about the debt? First, let's look at your interest payments. The credit card interest rate will be the highest. Then will come the rate on the business debt, with the mortgage interest lowest.
(If you were still in business and so able to tax-deduct the business interest, it might be lower than the mortgage rate on an after-tax basis. But it sounds as if that doesn't apply to you.)
The idea is to convert high-interest debt to low-interest debt. It can save you thousands of dollars.
Go to your mortgage lender and explain your situation. Ask to increase your mortgage to the highest possible amount. Also, if you can, extend the mortgage to the longest term so your payments are lower.
Use the new mortgage money to pay off your credit card debt. And from now on don't put any more on the card than you can pay off when the bill comes.
Then use the rest of the new money to reduce the business debt.
Next, pretend you are suddenly earning only one income. Couples quite often lose one partner's income - when they have a baby or one person becomes ill or is made redundant. They survive, and so can you.
Use the "lost" income - plus, if you can manage it, whatever you've gained from extending the mortgage term - to pay off the rest of the business debt as quickly as possible. Then start working on getting the mortgage back down.
If for some reason you can't increase your mortgage, just start straight in on paying off all the credit card debt with the "lost" income, then work on the business debt.
All of this will take a bit of self-discipline. But you've got the motivation - to keep your house.
You can do it. And it's going to feel so good when you cast off the burden. Your Dad will be pretty happy, too.
* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. We cannot answer all questions or correspond directly with readers.
Money Matters: Quick profit not what it appears
AdvertisementAdvertise with NZME.