BT Share Offer: Why now?

The deadline for Westpac's (ASX: WBC) partial sale of its stake in BT Investment Management (ASX: BTT) is approaching. Raising $221m for the bank, the offer closes at 5pm on Friday 10 July.

If you owned shares in either Westpac or BTIM as of 7pm on 11 June you will have the opportunity to purchase, without any brokerage or transaction fees, either 600 or 1,200 shares in BTIM at $8.20. Unlike some previous offers, the price retail investors will pay is the same as that paid by institutions.

As ever, the key question is why Westpac is selling. Only businesses urgently needing cash sell stock cheaply and Westpac does not fit into this category. The company claims it wants to 'realise the value created by BTIM, increasing Westpac's capital ratios', which is a long-handed way of saying Westpac thinks this is a good time to sell. And it is. BT's share price has quadrupled over the past three years and tripled over the past two. On almost all valuation measures, including a PER of 18, BTIM looks expensive.

Despite reducing its holding from 59% to between 31% and 40%, Westpac will also retain control of the company. For BTIM, the benefits are a more diversified ownership and increased liquidity that could potentially see the company added to another index (it's already in the All Ordinaries index),  triggering greater demand for its shares and, management hopes, a higher share price.

In share offers such as this one, you should always ask the same question: Do you want to buy from a seller that knows the business well at a time when funds management businesses are anything but cheap?

The answer is almost certainly 'no'. If BTIM shares were underpriced the share offer would probably not be taking place. It's happening because the shares are expensive, and that's not a recipe for investing success.

The implied dividend yield of over 4% and the lack of any transaction fees relating to the offer may look attractive but there is simply no margin of safety to make the  price tag attractive.

There is a caveat, however. Westpac is allowing you to buy BT shares at the same price as the institutions paid ($8.20). As that is a discount to the market price of about $8.50, there is potentially an arbitrage profit available. But bear in mind you won't get your new BT shares until around 16 July, so there's some chance the stock might fall below the $8.20 offer price over the next few weeks.

If BT stock rose a lot between now and the closing date (10 July), speculators might make a judgment that it was worth buying in the short term but for long term investors it's best to AVOID the share offer. As for BT itself, unless the price gets a little more interesting we won't be covering the business at this stage.