Stock takes: Know your rights

The recent spate of equity raisings, particularly those by Nuplex and Fletcher Building, have sparked considerable discussion, comparison and criticism.

Nuplex's rights issue has been panned for several reasons, the sharpest criticism being that the eventual shape of the deal - an option for the organising broker and underwriter First NZ Capital to allocate a number of additional shares to sub underwriters - favoured big institutional investors over the long-suffering "mums and dads", or retail investors.

Having taken a look at this and the role of Nuplex's adviser First NZ Capital, market operator NZX reckons First NZ, and the market, have been done "quite a disservice".

A source quoted in a Sunday Star Times story detailing criticism of the deal "didn't know the facts, didn't know what was going on and has cast a slur unnecessarily on the market and some of those firms," NZX chief executive Mark Weldon said on TVNZ's NZI Business programme yesterday.

It turns out that the Shareholders Association's Bruce Sheppard has written to the company asking for an explanation of the elements of the deal. That letter and chairman Rob Aitken's response were released to the market yesterday.

At least Sheppard had some kind words for Nuplex's choice of a rights issue to raise the capital needed, a mechanism he said was preferable for retail investors who until recently made up 75 per cent of Nuplex's register.

Sheppard sets out the association's view that "subject to market conditions and share liquidity ... any need for new capital within a business currently owned by certain shareholders, should be the prerogative of those shareholders to provide at first instance".

As for Aitken's response, take a look on the NZX website and make up your own mind.

FAVOURITISM?

Most market participants would probably agree in principle with Sheppard's comments about rights issues, but his choice of the words "subject to market conditions" is an interesting one.

Rights issues are by their nature relatively lengthy and cumbersome processes, which can leave a company, its shares and investors vulnerable to market volatility and uncertainty, of which there is no shortage right now.

Then again, Fletcher Building has come in for some criticism for choosing a three-part process, consisting initially of a large placement of shares to institutions. Some argue that this again disadvantages smaller existing shareholders who are denied the opportunity to participate and therefore have their holdings diluted.

The "Share Purchase Plan" which was a feature of the Fletcher fundraising and the Freightways transaction this week is an attempt to address this problem, but with a cap on the number of shares that can be obtained under these arrangements, there is a subset of investors too small to participate in the placement who will be unable to buy sufficient shares to avoid dilution.

The Fletcher deal's third leg, a "Top Up" plan, is intended to mitigate that, but there's no guarantee there will be any shares left from the Share Purchase Plan for this purpose.

At least from the company's perspective, the initial placement being underwritten, it was always going to raise the capital required, and most of it very quickly.

EQUITABLE EQUITY

Hamilton Hindin Greene broker James Smalley says there are pros and cons for rights issues and institutional placements and, in any given situation, pros and cons in being an institutional or retail investor.

On balance, he suggests, institutional placements are probably a better choice for companies needing new equity at present.

"A pro rata rights issue is expensive to do and there's uncertainty as to how much cash the company will raise. From a company's perspective it's much more efficient to go down the placement track.

"It does remove some of the uncertainty from a capital raising out of the share price and perhaps a placement is better for where the shares trade on the secondary market - Fletcher Building is a classic example."

Fletcher Building's shares yesterday closed 10c lower at $6.05, not far off where they were immediately before its capital raising was announced last week.

However, as Weldon said yesterday morning, there are moves afoot to amend securities legislation dealing with capital raisings that will make rights issues an easier, faster and more attractive option for companies, as well as for their existing investors.