Hard times

 <p>THE RECENT SHARP INCREASE in Shoprite's share price, already more than 20% this year, is starting to hit chairman Christo Wiese, who is also its largest shareholder. In the Finweek issue of 12 November last year, we pointed out Wiese had in fact entered a remarkable motion of no-confidence in himself and Shoprite. In a huge transaction - called a zero cost collar - he gave third parties the option of buying as many as 7,5m of his Shoprite shares at prices between R81 and R87 from August 2012 to February 2013. Wiese owns 82m Shoprite shares. </p>
<p>A few days ago Shoprite's share price already touched R80 and somewhere in the market there must have been somebody licking his lips at the privilege of buying some of the 2,5m Shoprite shares from Wiese for R81 to R85 in the first draw of the zero cost option on 7 December 2012. The general feeling among analysts is that Shoprite's share price could even top R100 before year-end 2011. </p>
<p>Wiese last year chose the zero cost option in order to use the proceeds from the sale of the call options to buy put options at exercise prices as low as R47 to R55/share, also for the period between December 2012 and February 2013. The message of that transaction was clear: the market, and also its share price, for Shoprite would fall. Protection against that fall in Shoprite's share price to perhaps as low as R40 is more important for me than still sharing in the potential increase in Shoprite's price to more than R87/share. </p>
<p>Meanwhile, business is suddenly booming in southern Africa and Shoprite continues to do better and better. Pick n Pay sometimes tries to object, but Shoprite is no doubt now southern Africa's preferred food retailer. </p>
<p>Over the past few weeks Wiese tried to correct his mistake with the zero cost option partially by regularly doing single stock futures transactions - that is, transactions for future delivery - on Safex. Since the zero cost option transaction in October 2009, he's already bought single stock futures on 400 000 ordinary shares. The most expensive was 100 000 shares on 16 March at 7779c/share. With the benefit of hindsight, of course, it made no sense to sell call options, which are valid till August 2012, at a take-up price of R81 in October last year and then to buy those shares back indirectly in March 2010 by way of single stock futures at 7790c. </p>
<p>In any case, with his 82m Shoprite shares currently worth more than R6bn, and his career of more than 50 years, Wiese has often proved he knows what he's doing. </p>
<p>But sometimes the market turns and snaps at even the best of them. Even Warren Buffett has admitted that. </p>
<p>Shoprite CEO Whitey Basson apparently doesn't regularly play around on the market with Shoprite shares as Wiese does. But remember: in terms of Shoprite's share option scheme, Basson receives a large number of shares every year. Last year, 10m were awarded to him at just R6,51/share. The value of the transaction was R65,1m. </p>
<p>But Basson decided to sell the shares immediately and on the day before Christmas last year he sold 3 778 920 of the 10m awarded him. The price was R65,96 each. He subsequently sold another 404 312, bringing the total shares sold to 4 183 232. The total amount earned was R275,7m - that's R210m more than he paid for the 10m option-scheme shares. And he still has half of them left. Now that's nice. </p>
<p><img src='http://www.fin24.com/downloads/Media/article_images/fweng_img/2007/sep/ee_hik290410.gif'> </p>
<p>Tax on capital gains vs income tax </p>
<p>"THE WEALTHY pay a lower rate of tax on capital gains than the shop cleaner on his salary," was one of the sharp comments made last week by the leader of the Liberal Democrats, Nick Clegg, in Britain's first public political debate between the three most important leaders who will oppose one another in the coming election. It's no surprise that he's now the most popular of the three. </p>
<p>Nick Clegg really should come and visit us here in SA, whether he becomes Britain's new Prime Minister or not, because the same applies here. </p>
<p>In SA, the effective tax rate on capital gains for individuals is 10%. This is how it works: only 25% of the capital gains on the sale of assets is added to your taxable income, and then the total individual income is taxed at the marginal tax rate up to a maximum of 40%. In other words, 40% of 25% is 10%. </p>
<p>In SA, capital gains tax must be paid on profits earned on the sale of shares that have apparently been held for longer than three years. There are certain exceptions. When shares have been held for less than three years, the prescribed test must be applied to determine whether a transaction is of a capital or income nature. For listed companies, it's easy to run a share option scheme that in fact succeeds in converting ordinary remuneration into capital gains. </p>