Missing out on easy money

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This was published 14 years ago

Missing out on easy money

By Stephen Mayne

Australian investors seem to be finally cottoning on to the tactic of applying for extra shares in entitlement offers - something which has now delivered this columnist more than $150,000 in windfall gains over four months.

However, what transpired at oil company Santos last week finally blew the whistle on a farcical system that has rewarded a small minority and seen retail investors as a class transfer billions of dollars of value to big institutional investors.

Informed sources tell BusinessDay that a single Santos retail investor with a small holding lodged a valid application to buy more than $100 million worth of additional shares in its recent capital raising.

This is clearly ridiculous and it is believed a big institution with access to huge piles of cash was masquerading as an ordinary small investor.

The investor could have got the lot because so many small Santos shareholders failed to take up their discounted entitlement.

However, the Santos board responded by constructing a uniquely discriminatory scale-back policy designed to punish the cheeky institution. It was explained as follows:

''All shareholders who applied for up to and including 5000 additional new shares will have their applications allotted in full. Where shareholders applied for more than 5000 additional new shares, the number of additional new shares will be limited to three times that shareholder's original entitlement under the Retail Entitlement Offer.''

Santos was seeking $1.25 billion from its retail investors in what was the second largest offer of its kind this financial year after retail giant Wesfarmers.

As the proud owner of just 13 Santos shares, this columnist was only entitled to buy another 3 shares in the 2-for-5 offer at $12.50 each, but the company accepted the $31,000 application in full and allotted 2480 new shares. These were duly sold on the first possible day for a profit of $3968.

Compare that with someone who owned 1000 Santos shares and applied for an extra 10,000 shares in the offer. Under this extraordinary scale-back policy, they were only allocated 1200 new shares despite giving the company $130,000 and having a $14,000 investment to start with.

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Santos ended up returning $260 million to its retail investors - albeit more than $100 million on just one account - which left it with a $312 million shortfall on the retail offer which was picked up by the delighted under-writers and sub-underwriters who are today sitting on a profit of more than $50 million.

The strange Santos scale-back policy is the latest development in what is turning into a complete casino.

While most companies allow shareholders to apply for additional shares in entitlement offers, the prospectus rarely sheds any light on the scale-back policy and directors reserve the right to maximum flexibility.

That was certainly what we saw from the directors of Horizon Oil who managed to create two classes of retail shareholders when constructing its punitive scale-back policy which was explained as follows:

''Those applicants who acquired an initial shareholding in Horizon Oil on or after the date of the announcement of the Share Purchase Plan (SPP) on 14 April 2009 and who held less than 5000 shares on the closing date of 28 May 2009 will be allocated 5000 shares.''

Given the Horizon offer was at 10 cents and everyone else got 100,000 shares, that was a pretty savage and selective scaleback, which cost the company's newest shareholders a profit of about $4.2 million.

Horizon was one of many disorganised companies during the present spate of capital raisings which left the door open to new investors by having a record date that was well after the announced share offer.

Given Horizon shares had sprinted ahead to 17 cents, it was a no brainer to get on the register, take up the full $10,000 SPP and then sell on the first day.

That's what almost 1000 shareholders did as the Horizon Oil share register expanded by about 25% to 5200 since April 14. Alas, the directors hit back with a discriminatory scaleback when they shouldn't have created the opportunity in the first place.

There have been a series of companies that made the same mistake during this recent capital raising frenzy and it is not just small fry such as Lincoln Resources, coal explorer Eastern Corporation, White Energy Coal and ING Private Equity.

Tabcorp claimed its record date was February 4 - three trading days after the $300 million placement and subsequent $87 million share purchase plan was announced on January 29 this year. Given it takes three days for trades to settle, this was designed to shut the gate.

Alas, your columnist's wife Paula bought $500 worth of Tabcorp shares on January 30 and still received the $5000 offer, making a quick profit of $400. Let's hope Australia's biggest wagering company has a better system of preventing punters from laying bets after the horses have bolted.

Check out this full list of companies which inexplicably delayed their record dates. The other notables include mining project manager Ausenco, chaired by former Queensland Premier Wayne Goss, Graincorp, Macarthur Coal, cement manufacturer Adelaide Brighton and steel and pipeline maker Crane Group.

The effect of this blunder is that existing shareholders get diluted because a much larger figure is raised through the discounted share purchase plan and sometimes the influx of opportunists such as your columnist can cause everyone to get scaled back.

Look no further than Adelaide Brighton, which announced a $100 million placement at $1.78 a share on April 8, 2009, but the $10,000 share purchase plan wasn't launched until May 14 and the record date was May 6.

Your columnist was already one of about 10,000 Adelaide Brighton shareholders but this suddenly swelled to 13,000, with two of the opportunists, my wife and another relative. We collectively applied for $30,000 worth of shares but were scaled back to $14,640 and ended up making a quick profit of $3600.

Adelaide Brighton only wanted to raise an additional $15 million from retail investors but got swamped with $57 million worth of applications and ended up accepting $28.5 million using this scale-back formula.

Any long-time Adelaide Brighton shareholder should be furious with the board for allowing this situation to develop.

They've been unnecessarily diluted and scaled back. It surely can't be too hard for a decent board to devise a share offer and ensure that it only goes to people who owned the stock before the announcement.

Perth-based listed car dealer Automotive Holdings wrong-footed the opportunists when it looked like following the lead of Crane, Adelaide Brighton and others after revealing a placement on May 18 in which it promised ''existing shareholders the opportunity to participate in a share purchase plan, details of which will be announced shortly''.

Your columnist was already on board but encouraged three relatives and a staff member to each buy $500 worth of shares.

Alas, Automotive Holdings struck back on May 29 - after hundreds of new shareholders had joined the register - by announcing the SPP with a record date back-dated to May 18.

Well done to Automotive Holdings, proving once again that it is hard to get the better of a used-car salesman.

Your correspondent has been playing this game right across the public company space in 2009 as you can see from this list of more than 70 completed and upcoming capital raising plays.

These three previous articles for on capital raising tactics (one, two, and three) have generated a torrent of emails and the most common question is: ''How do you know a company is going to do a capital raising and get on the register beforehand?''

The answer is that you don't but in the case of these dunderheads, which leave the gate open, you just have to track the media or ASX announcements directly and read the fine print of every offer.

However, there have also been numerous examples of rumoured capital raisings and once the likes of property investors GPT and Dexus came back for round two in the great property trust capital raising splurge, it made sense to get on the registers of Stockland, Mirvac and ING Office, all of which subsequently came through with heavily discounted offers.

Another example is packaging company Amcor which is widely tipped to do a large capital raising if it secures Rio Tinto's Alcan packaging assets.

The whole Australian system of capital raising since the credit crunch blew up has seen retail investors diluted to the tune of billions, because the vast majority have neither the wit nor the resources to apply for heavily discounted in-the-money offers.

However, the profitable tales of this columnist and others does seem to have finally alerted investors to the potential upside from applying for extra shares to take up the shortfall left behind by others.

For instance, Wesfarmers offered $3 billion worth of heavily discounted stock to its army of retail investors in February and received $1.5 billion in entitlement applications and $300 million of ''overs'' or bids for extra shares.

In other words, the ''overs'' only comprised 16.7% of the record $1.8 billion sent in by Wesfarmers shareholders.

Contrast that with APN News & Media which yesterday disclosed its $16 million retail offer was massively over-subscribed with entitlement applications worth $8.8 million and ''overs'' of $39.4 million or 81.7% of the total $48.2 million bid.

You can see how the proportion of ''overs'' has risen with time through the major entitlement offers this year:

Wesfarmers (early March): overs comprised $300 million or 16.7% of $1.8 billion bid

Suncorp (mid-March): overs comprised $56 million or 29.3% of $191 million bid.

Fairfax Media (late March): overs comprised $50.4 million or 34.1% of $148 million bid.

Onesteel (early May): overs comprised $78 million or 32.8% of $238 million bid.

Billabong (early June): overs comprised $36.6 million or 54.6% of $67 million bid.

APN News & Media (mid-June): overs comprised $39.4 million or 81.7% of the total $48.2 million bid.

The trend is clear as the secret is out. Unfortunately, we can't include the three biggest offers this month because Santos, BlueScope and Stockland all failed to provide a break-down of entitlement applications and "overs''.

One of the biggest problems with the current system is the lack of uniformity in the disclosure and the complete lack of any transparent scale-back policy in the various prospectuses. The typical offer document just says the board can do what it likes and that's what has been happening.

Alumina, APN, Hastie, DUET, MacMahon and Aspen Group have between them allotted your columnist less than $1000 worth of shares despite receiving applications exceeding $120,000. This is because they devised a scale-back policy with no minimum allocation, unlike the vast majority of top 100 companies in the same situation.

By way of contrast, Santos, Billabong, BlueScope, Suncorp, Stockland, Avexa, Peet, Ceramic Fuel, IBA Health accepted every dollar of more than $300,000 worth of applications even though I was entitled to less $2000 worth of new shares across all of their offers.

As one of the smallest shareholders in more than 650 companies (see the full portfolio here), I've been making windfall gains but the whole exercise has been a lottery and completely unfair for the investors who haven't participated.

For those companies which are still to cross the disclosure bridge, here is a simple template on which to base the announcement of any scale back.

1. Follow the lead of Macquarie Group and reveal the number of shareholders that applied, although it would be useful to add the number that were eligible.

2. Reveal how many shareholders applied for what dollar figure of entitlements and then how many of these shareholders applied for what dollar figure in ''overs''.

3. If doing a scale back, clearly state the policy, make it consistent and reveal the number of shareholders who get scaled back, the dollar figure involved and whether these funds go to institutional underwriters.

An even better solution would be for all companies to raise capital through renounceable rights issues, where those who don't take up the offer still receive some value from the sale of their rights through an institutional bookbuild.

After all, we're supposedly a nation of shareholders but yesterday's APN News & Media raising is one of the first retail offers in years to attract applications from a majority of the eligible shareholders.

And at 56% that still wasn't too flash given the shares were trading at $1.50 when the $1 offer closed last week. You can only shake your head and wonder what the other 44% were thinking.

Who is looking after their interests? Surely it is time for ASIC, the ASX and the Federal government to take a long hard look at the system.

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is a shareholder activist and publisher of The Mayne Report. He contributed this article to and can be reached on stephen@maynereport.com

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