Bloomberg Business News
If you think initial public offerings by thrifts in the United States are big business, take a look at what's going on in Britain.
Halifax Building Society, Britain's biggest mortgage lender, says that in June, when it becomes bank, it will give away so many free shares to members that printing the documentation will take 30,000 trees.
An estimated 16 million customers will get about $32 billion in windfall shares or cash, most of it untaxed, when the Halifax and four other building societies join the banking industry this year.
Building societies, structured like U.S. credit unions, are mortgage- and-deposit institutions owned by their customers.
Though economists say the cash injection into the economy should help certain retailers, they differ on the extent of the gains and on whether they will fuel inflation.
"Given the prospect of large windfalls, the outlook for retailers this year is positive," said Clive Vaughn, economist at retail consultants Verdict.
Four of the five building societies will be converting to banks by distributing shares to their members between May and September. Some, like Halifax, will distribute a certain number of shares to each member and extra ones according to the individual's savings.
Others, like Alliance & Leicester, will give members a flat 250 shares each, regardless of their loans or deposits.
Halifax will pay out about $20.1 billion in shares to 8.5 million customers. It has said it will plant a forest to replace the trees used to produce transfer documents, which are similar to prospectuses.
When the Woolwich, Alliance & Leicester, and Northern Rock building societies convert to banks, they too will give their members shares. Most customers will receive between $1,340 and $3,350.
Bristol & West Building Society has announced that it will be bought by Bank of Ireland for $1 billion.
Paul Franklin, a spokesman for the Inland Revenue Department, the government's tax agency, said these payouts are subject to a capital gains tax, which ranges from 23% to 40%, depending on the taxpayer's income.
But most building society members will escape the tax, since each taxpayer is allowed a tax-free $10,000 a year in capital gains.
With the proportion of income saved already declining in Britain, some economists think a substantial proportion of these payouts will bespent on consumer products. In particular, they will buy durable goods - expensive items such as washing machines and other home appliances that are made to last at least three years. Durable goods are already benefiting from a rebound in the housing market.
"Profits from windfalls tend to be spent on durablegoods," said Verdict's Mr. Vaughn. "People are buying items that cost a lot of money that they have put off buying for a number of years, during times of lower economic growth, such as refrigerators and winter coats."
Simon Briscoe, economist with Nikko Europe, estimated that about one third of the money would be spent and two thirds saved. That means about $10 billion to $13.4 billion would be spent in the next two years. He based his prediction on a survey of 2,000 customers who received payouts in the past when building societies were bought by banks.
"Windfall income will generally be spent on windfall expenditure - most of what will be spent will go on holidays, home improvements, and clothing," Mr. Briscoe said in a report.
He estimated that sales in these retail sectors could rise 2% to 4%. "The narrowness of this boost to consumer demand means that the corresponding boost to inflation will be less," he said.
Some economists worry that increased demand resulting from windfall gains will persuade retailers to raise prices.
The payouts will increase the "risk of inflation that already exists from greater consumer spending," said Mark Miller, a U.K. economist at Morgan Stanley."With the consumer in good form this year, there is no reason for retailers not to increase margins as the year wears on."
