(News Bulletin 247) – This operation, without impact for the shareholder, allows the company to regain a stock market luster lost over the course of disappointments.

A company can decide to consolidate its shares if it judges that its stock price is too low. This is the case of Orpea, which announced on Monday a consolidation of 1,000 of its shares, with a view to regaining attractiveness after a heavy and painful restructuring.

The consolidation of shares allows a company to reduce the number of shares in circulation, and to increase the price of its stock price in proportion to the consolidation parity announced by the company. Meanwhile, the company’s market capitalization remains unchanged.

For the shareholder, this operation is therefore painless. It has no impact on the value of shares and is purely technical. To illustrate this mechanism, there is nothing like a concrete example.

Orpea announced on Monday February 5 a consolidation parity of 1,000 old shares for one new one as part of its operation. Taking into account the closing price on Monday February 5, the Orpea share would therefore increase from 0.014 euros to 14 euros, to reflect this grouping of 1,000 old shares for one new one.

Concretely, a shareholder who holds 2,000 old Orpea shares will be automatically allocated and without any fees, 2 new shares with a nominal value 1,000 times greater than the price of the old share. This is the simplest case since it is a multiple of 1,000. On the other hand, a unitholder who owns a number of shares which is not a multiple of 1,000 will be faced with several options.

Option 1: Buy additional shares or sell excess shares to round the number of Orpea shares to a multiple of 1,000.

For example, a shareholder who holds 5,600 Orpea shares will either have to buy 400 shares to round up to 6,000 shares or sell 600 excess shares, these are fractional shares, to drop to 5,000 shares.

Option 2: Do nothing. In this case, these excess shares – 600 in this case – will be automatically compensated by the financial intermediary within 30 days from March 22, 2024.

Orpea specifies that the costs linked to any sales or purchase orders linked to the management of fractional shares fall within the relationship with the financial intermediary.

In an educational effort that should be emphasized, the company has clarified that this consolidation will not guarantee the maintenance of prices at the post-consolidation level, i.e. that at the close of February 21. “Everything will depend on the exchanges between supply and demand for the new Orpea shares on Euronext Paris from March 22, 2024,” specifies the retirement home operator.

Improve perception

If for the shareholder this operation is neutral, it has, on the other hand, a valuable virtue for a company. This grouping of shares allows it to see its price move out of the unflattering category of “penny stocks”, these shares whose price is less than 1 euro and which are at the mercy of high volatility. Also, a stock relegated to penny stock status considerably limits its attractiveness to funds and other institutional investors.

Share consolidation is not an exercise reserved only for small and medium-sized companies to escape the category of penny stocks. In July 2023, Air France-KLM decided to allocate one new share with a nominal value of 10 euros against 10 old ones with a value of 1 euro. The number of shares in circulation was logically divided by 10.

The consolidation of shares is also the mirror operation of the fractionation of shares or “split”. The latter results in a division of the number of shares that the shareholders own at the time of the operation.

For the shareholder, here too, the operation is completely transparent. And for future investors, this puts the stock within the reach of a greater number of people and allows them to split their orders more finely if necessary. But a stock split is not a non-event: it is above all an indicator of strong stock market strength, unlike the regrouping which follows a sharp decline in the stock. These two operations have been authorized in France since a decree of October 26, 1973.

However, reverse stock splits should not be confused with share buybacks. In the first case, the operation has no impact on the value of the shares for shareholders and is purely technical. The share buyback is, for its part, an operation which consists of a listed company acquiring its own shares to support its stock price and therefore indirectly rewarding shareholders who remain invested.

To turn the page on a turbulent stock market story

To return to share consolidations, this operation allows a company to turn its back on a troubled stock market past. Either because it has accumulated disappointments with poor results, or because it has regularly resorted to dilutive financing which increased the number of shares in circulation.

In the case of Orpea, this grouping of shares in packages of 1,000 will considerably reduce the number of shares in circulation to 159 million compared to currently 159 billion (!). This impressive number of shares in circulation can be explained by the three capital increases carried out by the company in recent months which will allow it to erase part of its debt and regain better financial health.

The retirement home operator hopes with this grouping to turn the page on a stock market rout which began on January 24, 2022, with the release of the investigative book The Gravediggers highlighting facts of mistreatment in its establishments. Since then, Orpea has seen its valuation melt like snow in the sun. The stock was trading at more than 80 euros before the scandal broke out in January 2022, only trading at less than 0.02 euros to date.