Frasers Group (encompassing House of Fraser, Flannels etc.) has launched a share buyback programme to purchase £80m of its own shares. What is a share buyback programme and why would a company choose to effect buybacks of shares (effectively reducing its share capital)?

What is a share buyback? 

A share buyback is exactly what it says on the tin – the company buying back its shares. The issuing company (here, Frasers Group plc) plans to buy back shares from its shareholders for a fee. The shares will then either be cancelled or they may be held in treasury (if purchased with distributable reserves) by the company and ultimately be re-sold or cancelled.

Why effect a buyback? Commercial considerations

• Return surplus cash to shareholders (for example, if there is cash that is not earmarked for a particular purpose and cannot be invested to produce a suitable return).
• Provide an exit route for shareholders (for example, in a private company context, a minority shareholder who may wish to be bought out, a retiring shareholder or a deceased shareholder).
• Restructure share capital (a company may wish to purchase redeemable shares prior to their redemption date, or eliminate or reduce a class of shares).
• Increase the company’s gearing ratio (being the company’s ratio of debt to equity, since buying back shares followed by cancelling them will reduce the amount of equity.
• Increasing earnings per share (which, for listed companies, may be important. The remaining shares will receive a higher percentage of dividends than they would have previously (depending on share classes and rights). For example, if there are 100 ordinary shares in a company, each share would receive 1% of the dividend. If 50 shares are bought back, there are only 50 shares remaining and each shareholder would receive 2% of the dividend.
• Increasing the share price (again, for listed companies, share price could potentially increase - depending on the market). In theory, the company’s value stays the same and there are less shares in issue so each share would be worth more. Similar to the example above, if the company’s value is £100 and the shares in issue are reduced from 100 to 50, you would expect the value of each share to double as each shareholder should now have double the stake in the company.

After Frasers Group plc announced its share buyback, its share price increased by 2.6%.