Brian Gaynor: Small shareholders left out in the cold

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COMMENT:

John Hawkins, who stepped down as chairman of the New Zealand Shareholders' Association (NZSA) last week, departed with a final plea on behalf of members.

On April 30, his last day as a stellar NZSA chair, he severely criticised Ebos for its $175 million placement to institutional shareholders.

Hawkins was quoted as saying: "the issue which was discounted 8 per cent below the market price was a free gift to a few privileged larger organisations at the expense of many smaller investors".

Ebos raised the new capital to repay debt but Hawkins argued: "They could have done an accelerated rights issue to achieve the same outcome which would have treated every investor fairly, but they have deliberately chosen not to do so. Adding insult to injury, Ebos has paid to have the issue fully underwritten which is a further impost on the majority of shareholders who cannot participate".

Ebos chairman Mark Waller has a different view, which he expressed in an email to an NZSA member. Waller wrote: "The Ebos board was very mindful of any potential dilution to smaller shareholders when considering how best to raise capital. Just prior to Christmas last year, we planned a similar capital raise with an allocation for all shareholders under a SPP (Share Purchase Plan). This did not work owing to global market timing factors".

He continued: "We currently have a number of interesting opportunities which made it worth raising some extra capital quickly to allow Ebos to be in a position to seriously consider them. The capital raise we have just made was several times over-subscribed and in particular the demand from Australian institutions was important for our future growth and ASX listing. Since the modest capital raise (relative to Ebos's size) our share price has strengthened beyond what it was prior so there has been no loss of value to you".

The NZSA is totally opposed to these placements, particularly when they aren't accompanied by SPPs or other retail components, but many companies strongly supported their decision to confine these placements to large institutional investors.

The accompanying table shows that NZX listed companies have raised $1.659 billion of new capital since the beginning of 2018 — $1.226b, or 74 per cent, through conventional rights issues and the remaining $433 million through placements.

These rights issues and placements are keenly sought after, particularly as the NZX has had no IPOs over this 16-month period.

Ebos has had the largest placement, raising $175m, and Precinct Properties is in second place with $130m. The Precinct Properties issue was also underwritten but its price discount was only 3.6 per cent compared with 8.0 per cent for Ebos.

Precinct Properties raised an additional $22m from retail investors, a figure that is not included in the NZX database.

Kathmandu's $40m placement in March 2018, which was underwritten, partly funded the acquisition of Oboz Footwear, the Montana based designer of footwear for backpacking, hiking and travel. Kathmandu also raised an extra $10m through an SPP, which was not underwritten or included in official NZX data.

Steel & Tube raised $21m through a placement at $1.15 a share in August last year but at the same time it announced a rights issue which raised $60m. The latter was available to all shareholders at $1.05 a share.

The Foley Family Wine placement at the end of 2018, which raised $19m at $1.48 a share, was to "partially fund the Mt Difficulty acquisition and new capital projects". There was no SPP or general retail offering associated with this placement.

The sixth largest placement was the $15m raised by Serko in August 2018 at $2.75 per share, a 3.2 per cent discount to the previous closing price.

A Serko statement revealed that: "The placement was well supported, attracting bids from a range of institutional investors across New Zealand and Australia, with institutions allocated stock, as well as strong participation from retail investors".

According to their 2018 annual reports, Serko had only 998 shareholders, Foley Family Wine had 920 and Ebos had 6959.

The larger number of Ebos shareholders clearly demonstrates why the NZSA has paid far more attention to the medical supplies group than the Serko and Foley Family Wine offerings, which didn't include SPPs.

The other smaller placements since the beginning of 2018 were by Chatham Rock Phosphate, Geo, Moa Group, Pacific Edge, QEX Logistics, ikeGPS, TruScreen, TeamTalk, Snakk Media and General Capital.

The largest rights issues over the same period, according to the NZX, have been as follows:

• Fletcher Building, $736m
• Tilt Renewables, $274m
• Gentrack, $90m
• Steel & Tube, $60m
• Seeka, $50m

The NZSA has been battling placements for years, including a Spark placement in 2001, GPG in 2006, The Warehouse in 2014 and Heartland on several occasions.

Hawkins wrote in 2013: "Recently we have seen increasing numbers of companies using a combination of 'placements' to institutional investors and Share Purchase Plans (SPPs) for small investors to raise additional funds. These include Argosy, Hellaby, DNZ and Metlifecare.

"The NZSA is becoming concerned at the way this trend is developing. Essentially a SPP allows an existing investor to buy up to $15,000 worth of new shares, regardless of their holdings. This is inequitable in two ways. Large shareholders may need a large amount to avoid dilutions and smaller shareholders are unreasonably disadvantaged. In addition, if you do not purchase shares you get nothing, but are diluted."

The NZSA is not one-eyed on the issue; it recognises that placements can be a legitimate option when companies are in trouble and need to raise new capital quickly. The Evolve Education announcement this week is an example of this.

However, Ebos is not in trouble and doesn't appear to need to raise $175m in a hurry.

Hawkins supported the Precinct Properties approach earlier this year and wrote: "The recent Precinct arrangement was a good idea. From memory they did a placement for $130m and then $20m in what was effectively a placement to all retail applicants of up to $50,000 depending on the original holding. The effect was that no one was diluted and to ensure this they expanded the offer slightly when demand was a bit higher than anticipated".

But one of the biggest issues with these placements is that they are often controlled by the underwriting brokers and discounted shares can be allocated to the underwriter's preferred clients, both institutional and retail.

Ebos shareholders with more than $250,000 worth of shares report that they were offered nothing in the recent placement while others, who had no Ebos shares, were given the opportunity to participate in the $18.70 a share offer.

The original Ebos placement was supposed to be for $150m but $175m was raised. Where did the additional $25m worth of shares go? Did they go to existing Ebos shareholders or to clients of the underwriting brokers who had no existing Ebos shares?

The NZX is struggling and it is very important that all participants feel that they are given equal opportunities if the domestic bourse is to attract wider individual participation.

Two decades ago there was a huge battle to introduce a Takeovers Code that would treat all investors equally. Several major brokers were totally opposed to the code but they were eventually overruled.

We need another major campaign to ensure that small shareholders are given a better deal when their companies are undertaking non-urgent capital raisings.

- Brian Gaynor is director of Milford Asset Management, which holds shares in many of the companies mentioned in this column on behalf of clients.