Brian Gaynor: Placements popular in latest share issues

Brian Gaynor

The recent round of equity raisings by NZX listed companies has generated a large amount of discussion and controversy. This is due to a number of factors including poor communication, confusion regarding share issue procedures and recent rule changes.

Most of the share issues have been well run although the Nuplex capital raising has been the subject of shareholder, media and investment industry criticism.

The main forms of new equity raisings are as follows:

* Rights issues; shares are offered to all shareholders on a pro rata basis.

* Placements; prior to April 3 up to 15 per cent of additional shares could be issued in any one year without having to obtain shareholder approval. This has increased to 20 per cent from April 3.

* Share Purchase Plans (SPP); companies may offer all shareholders the opportunity to purchase up to $5000 worth of new shares in any 12-month period. The cap will be increased to $25,000 if the Securities Commission endorses a NZX recommendation.

* Top-ups or other types of issues; shareholder approval is required if the amount of new shares being issued exceeds 20 per cent of the issued capital.

The Fletcher Building capital raising is by far the biggest with $406.5 million raised through the placement of 76 million new shares at $5.35 each. This represented 15 per cent of the pre-issued capital with the new shares issued before the cap was raised from 15 per cent to 20 per cent.

In addition, the company is introducing a Share Purchase Plan (SPP) whereby all shareholders will be able to purchase up to $11,500 worth of new shares at the lower price of $5.35 a share or a 3 per cent discount to the average price of Fletcher Building shares over a set pricing period.

The company is able to issue $11,500 of new shares to each shareholder under the SPP - instead of the statutory limit of $5000 - following the granting of an exemption by the Securities Commission. If the SPP is not fully utilised then the company can top up eligible shareholders to a maximum of $20 million at the placement price of $5.35 a share.

The $406.5 million placement - and $60 million of the $100 million SPP - has been underwritten by the lead managers, Goldman Sachs JB Were and Macquarie.

There are two main types of placement, a fixed-price placement or an issue at a price determined by an institutional book build or bidding process.

A fixed-price placement is more orderly with the lead managers, after consultation with the issuing company, determining how the shares are allocated. The Fletcher Building placement went well, with most large shareholders issued shares in proportion to their existing holdings.

Book builds tend to attract hot money and are less satisfactory because the new shares are often issued to parties that are not existing shareholders and are only interested in a quick profit. A number of Australian placements have been book builds but all the recent issuances in this country have been fixed-priced.

Issuing companies have to keep a careful eye on the lead managers because a number of placements in the past have gone to parties that were close associates of the placing broker or to parties that were only interested in quick trading profits.

The Nuplex issue started off as a $60 million placement to be followed by a $50 million pro rata rights issue to all shareholders but, following underwriting difficulties, it has ended up as a massive seven for one rights issue at 23c a share.

This has had a devastating impact on the company's share price, which started the year at $3.

The most controversial aspect of Nuplex's capital initiatives is the right of underwriters to purchase an additional 99 million shares, or 15 per cent of the post rights issue capital, at 23c a share.

The contrasting share price performance of Fletcher Building and Nuplex reflects the dilemma facing investors. Small and medium-sized shareholders have a limited participation in Fletcher Building's capital raising but they are getting shares at a significant discount to the current market price and the company's share price started the year at $5.74 and a 24c dividend was paid this week.

On the other hand, Nuplex shareholders get all the new shares they want but their existing shares are worth far less than they were at the beginning of 2009.

On April 1, Kiwi Income Property Trust announced a $50 million institutional placement of 56.9 million shares at 87.9 cents a share and with the intention to have a Unit Purchase Plan (UPP) with details to be announced later. The trust had the ability to issue more units as the new units represent just 7.8 per cent of the pre-issue capital.

Earlier this week Freightways released details of the placement of 18.45 million shares at $2.44 each raising $45 million. Freightways could have issued more shares as the placement shares represent only 14.3 per cent of pre-issue capital but most of its planning was done before the cap was increased to 20 per cent.

The company's SPP will allow shareholders to subscribe for up to $12,500 of new shares at the lower price of $2.44 or a volume weighted average price over the five business days prior to the launch of the SPP offer. The SPP has yet to receive a Securities Commission exemption, which will allow it to raise the subscription amount from the current limit of $5000 to $12,500 per shareholder.

Freightways, like Fletcher Building and Kiwi Income Property Income Trust, has raised new capital on the premise that economic conditions could continue to deteriorate and it is better to raise new equity while the company is still in a relatively strong position rather than wait until trading conditions have deteriorated, as Nuplex did.

Pike River Coal is having a conventional one for five rights issue at 70c a share and shareholders are being enticed by the offer of one free option, to be exercised at $1.25, for every additional new share purchased.

This enticement is encouraging fairly active rights trading even though existing shares are trading only slightly above the 70 cents a share offer price.

Metlifecare's two for five rights issue was oversubscribed and its shares are now trading well above the rights issue price of $1.08 a share.

Xero, the fledgling online accounting software development company, has been the most original and innovative.

It is issuing 20 million new shares to Craig Winkler, the founder of the Australian based software company MYOB, at 90c a share. As this represents 36.1 per cent of existing capital, the deal requires approval in terms of the 20 per cent placement cap and Takeovers Code.

In addition, Xero has placed 1.78 million shares with the Bank of New Zealand and 1.61 million shares to independent directors Sam Morgan and Graham Shaw. It will also have an SPP at 90c a share with the full details to be announced later.

Placements and SPPs are more popular at present because they can be executed quickly and underwriters are more attracted to them. The other positive feature is that they allow companies to strengthen their balance sheet and, if the issues are professionally managed, this should help underpin share prices.

Pro rata rights issues are the fairest but the Nuplex issue illustrates that wealth preservation doesn't automatically coincide with fairness.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com