A stockbroker spoken to by Shares described a decision by China-headquartered Taihua (TAIH:AIM) to sell new stock in order to then run a share buyback programme as ‘a strange transaction’.

In a statement to the stock exchange today, which has seen shares in the AIM-listed business soar 111% to 2.4p, Taihua’s board is proposing a capital raise of 27.2 million shares at 2.63p each.

Proceeds of around £716,000 are expected to be raised, with £500,000 of this applied to the share buyback and the remainder used for general working capital purposes.

While Taihua is issuing 27.2 million shares it plans buying back a maximum of 8.2 million shares, 10% of the company’s shares in issue, meaning the overall share count will increase.

Share buybacks are usually used to reduce a company’s share count which, if conducted at low prices, can increase value for shareholders. But Taihua’s plan involves buying shares at a price almost 100% higher than before the offer and also increases the company’s overall share count.

The equity raise is an open offer which means it is available to all shareholders, rather than only institutional investors as is typically the case in small cap transactions.

It is underwritten by Tao Ji, Taihau’s biggest shareholder, which means he will buy any shares not bought by other investors.

Taihua’s board argues it is inefficient to run a share buyback programme with the company’s existing resources because most of its cash sits in an operating company in China and remitting the funds would incur taxes.

Shareholders have been pressing the company to buy back shares to help some of them realise the value in their investment, according to Taihua’s statement.

‘Assuming the company will require £500,000 to pay for the share buyback, this would mean that TNP [Taihua’s operating company] would have to make a tax payment of around £273,800 in the PRC,’ said today’s statement.

‘The directors consider that this tax burden means that this would be an inefficient exercise and the tax costs would outweigh the benefits to shareholders.

‘Given it is not financially viable to undertake the share buyback out of the distributable profits available in the group, another option for the company is to buy back the shares out of the proceeds of a fresh issue of shares. The directors take the view that the open offer is a suitable way to raise the funds required to complete the proposed share buyback.’

While it is unusual for companies to raise equity to buy back shares, companies as high profile as Apple (AAPL:NYSE) have found themselves in a similar position around offshore cash.

Apple borrowed money in the US for a recent share buyback programme even though it boasts a cash pile of around $200 billion (£152billion) because most of the funds are held outside the US, according to an article in Forbes.

Taihua chairman Nicholas Lyth did not respond to a call for comment.

Issue Date: 25 Aug 2016