What is a Consolidation? Corporate Actions Explained

A consolidation is a mandatory corporate action event, meaning that you have no options concerning the outcome. You may not even be informed that it is going to take place, so the first indication to you could be a reduction in the number of share that you own. If you spot a reduction in your shareholdings, and you have not sold any shares, then check your account for signs of a consolidation (also known as a reverse stock split) before calling your investment adviser!

A consolidation is simply an exchange of existing shares for a fewer number of the same share type with an increase in the nominal value per share maintaining the company’s overall share capital. This means that although your shareholding is reduced, you do not lose any value as the market price of the shares will increase accordingly.

A company would issue a consolidation (reverse stock split) to increase the share price because they feel it would be more marketable at a higher price. The nominal value of each share is adjusted to maintain an equal total share capital as before the consolidation. The new shares are issued free of all charges to shareholders. On the effective date of the consolidation the price per share is adjusted to take into account the reduced number of shares in issue.

For example, the current market price of British TeaShops Plc shares is GBP3.30, with a nominal value GBP0.25.

Consolidation Terms: GBP0.05 nominal for GBP0.25 nominal value or 1 (new share) for (5 old shares).
Every 5 shares held of GBP0.25 nominal value is consolidated into 1 new share, each with a nominal value of GBP1.25.

Initial Holding: 50 shares of GBP0.25 are consolidated into 10 new shares of GBP1.25. All things being equal (not allowing for share price fluctuations) the new share price would be GBP16.50.

You own less shares, but the are worth the same, so it is the opposite of a bonus issue or stock split, when your shareholding is increased, but the price of shares is reduced, resulting again in the same value of your portfolio.

Key details:

1. Effective date – the day that the consolidation takes place in the market, and the day that your shareholding is adjusted
2. Ratio – how many new shares received in exchange for old shares
5. Resultant ISIN / Sedol – sometimes there may be a new line of stock. Often the old line remains.

Leave a Reply

Your email address will not be published. Required fields are marked *