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National Grid Shares the Wealth

American companies do a lot of things right, but I think in one respect their European counterparts have them beat. Most U.S. companies prefer to reinvest proceeds from asset sales rather than share that bounty with their investors, while the opposite is true on the other side of the pond.

The European reasoning is simple: since shareholders also are owners of the business, they’re entitled to a cut of the profits.

Such was the case earlier this year after London-based National Grid plc (NYSE: NGG) consummated the sale of a large stake in its gas distribution business to a group of Chinese and Australian investors. This transaction was controversial within the U.K., because it meant a foreign entity would gain control over one of Britain’s largest utility networks. However, regulators ultimately approved the deal.

NGG received 3.6 billion British pounds in cash (roughly equivalent to USD 4.7 billion), plus 1.8 billion pounds in debt financing in exchange for a 61% interest in its gas distribution division.

The amount of money involved was so large that on June 2 the company will make a one-time “special dividend” payment of 84.375 pence per “ordinary” share. That equates to $5.4224 on each share of the American Depository Receipt (ADR) that trades on the New York Stock Exchange (1 ADR equates to 5 ordinary shares).

The company also executed a reverse stock split of eleven shares for every 12 ADRs owned, thereby decreasing its float by the same percentage. The intent of this dual transaction is to leave the company in the same relative financial position that existed prior to the asset sale, allowing future performance metrics to remain comparable on a per-share basis. In that respect, the net effect of the special dividend and stock split should be a wash for shareholders.

And that’s how it has played out so far, with NGG’s share price rising by approximately the same percentage as the reduction in the number of shares outstanding.

I doubt many U.S. companies would have handled the asset sale the same way, since they prefer reinvesting that cash to boost future growth. That’s fine if the money is used properly, but a large cash hoard sometimes creates pressure on management to spend the money even if there isn’t a compelling reason. All too often, the result is an acquisition that’s later discarded at a huge loss or a foray into a new line of business for which the company is poorly equipped to compete.

By distributing the proceeds from the asset sale to its shareholders, NGG delegates that decision to each investor. Those who approve of the way the company is managing its affairs can simply use that cash to buy more shares of NGG. But those who have a better use for the money, or would prefer to diversify their portfolios by reinvesting it into other businesses, can follow that route as well.


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