Last week, we received this request from a reader.
Dear Editor
I'm hoping you might consider publishing a commentary on the recent spate of share purchase plans and placements. The mechanism seems anomalous and disadvantageous from a shareholder's point-of-view. What intrigues and annoys me is that in almost all cases retail shareholders are not given the first and biggest bite of the (often very attractive and profitable) cherry. What seems to be the case is that institutional investors are given the bulk of the issue and smaller shareholders the residue (the crumbs).
Surely directors of a company are supposed to act in the best interests of all shareholders and yet they appear to ignore this by not giving preference to the company's owners - the people they are supposed to represent. The recent SPP/placement by Cochlear illustrates the point and inequities. Thanks for your publication.
***
The biggest equity capital-raising binge since the GFC is showing no signs of abating. However, Australia’s retail shareholders are getting increasingly scaled back and diluted by boards and investment banks.
After raising $1 billion from institutional investors, Ramsay Health Care initially proposed limiting its follow-on share purchase plan (SPP) for retail investors to just $200 million. But when $695 million came through the door from more than 41,000 applicants, it expanded this to $300 million, refunding $395 million.
Medical device company Cochlear trod a similar path, raising $880 million from institutions and then proposing a derisory $50 million cap on its SPP for retail investors. This cap was then reluctantly lifted to $220 million after 16,651 shareholders applied for $417 million worth of stock.
Allocate according to ownership
Neither Ramsay Health Care nor Cochlear, even after lifting their SPP caps, adhered to the principle of dividing up the capital raising to reflect the relative proportions of the company owned by institutional and retail shareholders before the capital raising was launched.
It’s not hard to comprehend. If retail shareholders own 30% of a company, the SPP should represent 30% of the overall capital raising.
National Australia Bank never respected that concept. It was 48% owned by its 615,000 retail shareholders before the board decided to launch an emergency $3 billion institutional share placement at the knockdown price of $14.15 in late April.
Retail shareholders were promised a compensatory $500 million SPP at the same price which was always going to be swamped, given that if all 615,000 shareholders applied for the $30,000 maximum, a whopping $18.45 billion would have come through the door.
The last 12 months have seen a step change in company disclosure about capital raisings, so we now have comprehensive data from 25 companies in terms of how many retail shareholders were sent capital raising offers and how many actually applied.
This is how NAB did it on Wednesday:
“The SPP offer was made to approximately 615,000 eligible shareholders, with valid applications received from approximately 155,000 eligible shareholders for a total value of approximately $2.9 billion. Valid applications received represented a participation rate of approximately 25% of eligible shareholders (representing 21% by shareholding), with an average application amount of approximately $18,500.”
NAB’s directors succumbed to pressure and used their discretion to increase the SPP from $500 million to $1.25 billion, meaning they are only refunding $1.65 billion.
Imagine if all retail investors participated
The Australian Securities and Investments Commission’s (ASIC) move last year to double the maximum amount of an SPP offer for individual investors from $15,000 to $30,000 has turbo-charged the structure as a capital-raising option, but imagine if all retail shareholders acted rationally.
NAB shares were 8.5% above the offer price when the SPP closed on May 22 but 75% of them, or some 460,000, didn’t bother applying at all.
One of the problems is that financial intermediaries such as brokers, financial advisers and accountants are not passing on the details of in-the-money SPP offers to their clients. Administrative incompetence has diluted retail shareholders out of billions of dollars over the years.
Sadly, the biggest losers in Australia’s anything-goes capital raising system are the retail shareholders who ignore an in-the-money offer. That is usually a substantial majority of the share register, as occurred with NAB.
Handsome fees to investment banks
Investment banks have now pocketed more than $300 million worth of fees, underwriting almost $20 billion worth of capital raisings over the past 10 weeks. They rarely get paid to underwrite SPPs. For instance, NAB’s $3 billion institutional placement generated $39 million worth of fees for underwriters Goldman Sachs and Macquarie, while the SPP generated nothing.
This is partly why boards should increasingly turn to their retail shareholders for fresh capital rather than listening to investment banks and tapping their institutional clients for excessive funds whilst not leaving enough cash on the table for the retail shareholders.
There’s more to come on this front. Lend Lease did a $950 million institutional placement last month, followed by a $200 million SPP. Gold miner Newcrest has a similar dilemma after it too did a $1 billion institutional placement but then proposed limiting its SPP to just $100 million.
At least they’ve worked out that their circa-60,000 retail shareholders, who will still probably throw about $500 million at the SPP, only own about 6% of the company, whereas they are being offered 9% of the capital raising.
A rare example indeed of institutional investors getting diluted.
Stephen Mayne is the Founder of Crikey, where this article was first published. He also updates data and writes at The Mayne Report. The author has participated in some of the SPPs mentioned in this story.
See also The Mayne Report’s article on best practice capital raising outcome announcements, from which we have extracted the following:
Best practice capital raising outcome announcements
Here is a selected list of best practice announcements by companies at the end of capital raisings in terms of disclosing information about retail shareholder participation rates.
Lend Lease: after a $950 million placement, launched a $200 million SPP that was expanded to $260 million and adopted best practice transparency but was the first to do it through dot points. See the SPP outcome announcement which included the following words:
- The SPP was open to 60,688 eligible securityholders.
- Lend Lease received approximately $429.4 million worth of valid applications from approximately 24,700 securityholders.
- The average application amount was approximately $17,400.
NAB: after a $3 billion placement, the $500 million SPP was expanded to $1.25 billion and the bank adopted best practice disclosure in this SPP outcome announcement:
"The SPP offer was made to approximately 615,000 eligible shareholders, with valid applications received from approximately 155,000 eligible shareholders for a total value of approximately $2.9 billion. Valid applications received represented a participation rate of approximately 25% of eligible shareholders (representing 21% by shareholding), with an average application amount of approximately $18,500."
Ramsay Healthcare: after a $1 billion placement, the $200 million SPP was expanded to $300 million and the company adopted best practice disclosure in this SPP outcome announcement:
"The SPP was open to 80,273 eligible shareholders and valid applications totaling $695 million were received from 41,877 shareholders, reflecting a participation rate for eligible shareholders of 52% and an average application amount of $16,596."
Infomedia: after a $70 million placement, the $15 million SPP ended up attracting $13.94 million and the company adopted best practice disclosure in this SPP outcome announcement:
"The SPP offer was made to 5,011 eligible shareholders. Valid applications totalling approximately $13.94 million were received from 771 eligible shareholders. This represents a participation rate of approximately 15.3% of eligible shareholders." And unstated, the average application was $18,080.
Monash IVF: completed an $80 million capital raising with some excellent detail when announcing the outcome of its $15 million entitlement offer where "overs" of 100% permitted. See SPP outcome announcement:
"A total of 1,203 valid applications for retail entitlements were received for approximately 10.1 million News Shares for approximately $5.3 million, representing a take-up rate by eligible shareholders of approximately 36%. In addition, a total of 424 applications for approximately 2.3 million News Shares for approximately $1.2 million were accepted under the top-up facility, increasing the total take-up from eligible retail shareholders to approximately $6.4 million representing a total take-up of approximately 43%."
Metcash: after a $300 million placement at $2.80, a $30 million SPP was launched which ended up being priced at $2.28, a 2.5% discount to VWAP. See SPP outcome announcement:
"The SPP offer was open to 19,124 eligible shareholders and valid applications totalling approximately $13.6 million were received from 1,214 eligible shareholders. This represents a participation rate of approximately 6.3% of eligible shareholders. The average SPP application amount was approximately $11,200."
SCA Property Group: after a $250 million placement at $2.16, offered a $50 million SPP and adopted best practice disclosure in this SPP outcome announcement:
"The UPP offer was sent to approximately 60,000 security holders and valid applications totalling $29.3 million were received from approximately 2,350 holders. This represents a participation rate for those security holders of 3.9% and an average application worth $12,500."
Next DC: After a $672 million placement, they completed a $190 million uncapped SPP in May 2020 and adopted the following best practice disclosure in its SPP outcome announcement:
"The SPP offer was open to 17,015 eligible shareholders and valid applications totaling approximately $191 million were received from some 8,684 shareholders, reflecting a participation rate for those eligible shareholders of 51% and an average application amount of $22,051."
Cochlear: responded positively to a transparency request using the following words in its 3-page SPP outcome announcement:
"The SPP offer was made to 36,724 eligible shareholders and valid applications totaling approximately $417 million were received from 16,651 shareholders. This represents a participation rate of approximately 45% of eligible shareholders. The average SPP application amount was approximately $25,000."
Webjet: Wrapping up its $118 million non-renounceable 1-for-1 retail offer in April 2020, the company responded positively to requests for extra transparency with the following words which provided more information on the "overs" component than any other issuer to date:
"The offer was sent to 24,060 eligible security holders and Webjet received 12,633 valid applications for approximate 50.4 million shares worth $86 million, implying a take-up rate of 72.7%. Webjet also received, under the top up facility, applications from 8324 retail investors for 27.5 million additional new shares in excess of their entitlement aggregating to approximately $46.7 million... All eligible applications for additional new shares will be scaled back by approximately 31%."
Afterpay: didn't go for precise numbers but still broadly embraced the improved disclosure template with these words on January 22, 2020. They were also the first issuer to do this when imposing a scale back on an SPP:
"The SPP Offer was sent to approximately 40,000 eligible securityholders and over 15,000 valid applications were received, representing a participation rate of 37% based on the registered holdings. As the value of applications, approximately $240 million, significantly exceeded the cap of $30 million for the SPP, the Afterpay board has decided exercise its discretion under the SPP terms to scale back applications to a total of approximately $33 million." See announcement.
Westpac: adopted the new model for disclosing participation rates in the SPP with these words on December 10, 2019:
"The SPP Offer was made to approximately 618,300 Eligible Shareholders, with valid SPP applications received from approximately 40,900 Eligible Shareholders. Valid applications received represent a participation rate of approximately 7% of Eligible Shareholders with an average SPP Application amount of around $18,850. The final amount raised of $770 million excludes approximately $68 million of withdrawal requests accepted from approximately 3390 Eligible Withdrawal Applicants." (Those who had applied before the AUSTRAC litigation was launched).
AMP: partially adopted the new model for disclosing participation rates in the SPP with these words on September 10, 2019 but didn't disclose low percentage of 2.1% and rounded up the participation number:
"The SPP was sent to 713,273 eligible shareholders, with valid applications received from approximately 15,000 shareholders and an average application worth A$10,000."
AMP reported that it had 738,817 shareholders in May 2019, so 96.5% were eligible for the SPP.
GPT: lifted a $50 million cap on its SPP to $66.8 million and then used these excellent words in the outcome announcement:
“The SPP offer was sent to 31,781 eligible Security holders and valid applications were received from 5,980 Security holders. This represents a participation rate of 18.8% and an average application worth approximately $11,170.”
GPT reported it had 32,614 shareholders in March 2019 so 97.44% of shareholders were eligible for the SPP.
Mirvac: see this announcement in July 2019 which included the following key paragraph:
“The SPP offer was sent to 24,158 eligible Security holders and valid applications totalling $46.2 million were received from approximately 3,386 Security holders. This represents a participation rate for those eligible Security holders of 14 per cent and an average application worth $13,600.”
Mirvac reported it had 24,183 shareholders in August 2019 so the offer was sent to 99.9% of shareholders.
Dexus: voluntarily set a new benchmark for transparency and data disclosure in their announcement in June 2019 by including this paragraph:
“The SPP offer was sent to 26,774 eligible Security holders and valid applications totalling $63.9 million were received from approximately 4,640 Security holders. This represents a participation rate for those eligible Security holders of 17.3 per cent and an average application worth $13,800.”
Dexus reported in August 2019 that it had 26,175 eligible shareholders so somehow the SPP was sent to 102.3% of eligible holders.
Woodside Energy: After email requests, it was great to get a positive response which saw Transurban-style disclosure from the oil and gas giant at the conclusion of its $2.5 billion PAITREO capital raising. Woodside's 1-for-9 offer at $27 saw $1.57 billion raised from the institutional offer which was 90% subscribed. The shortfall cleared at $29.60 giving $2.60 to non-participants. The $930 million retail offer retail offer opened on February 21 and rights trading ran from February 19 until February 28. Best practice set by Transurban saw Woodside make this ASX announcement, disclosing the size of the retail shortfall before the auction. It was 40% or 14.4 million entitlements costing $389 million. The announcement also revealed that $12 million worth of rights were traded in a range between $1.12 and $2.58.
Transurban: It is always pleasing to see new levels of transparency in the public company space and this announcement from Transurban on January 29, 2018 set a great benchmark. After making a specific request for additional disclosure of Transurban, we loved this response from the company because never before had there been such detail revealed on capital raising participation. When chronic non-participation by retail investors in capital raisings is a major problem, we need more data on what steps need to be taken to both lift participation and ensure non-participants are compensated fairly when diluted.
Transurban revealed that 53,800 shareholders applied for $395 million shares, comprising 72% of the $554 million worth of new shares on offer in the PAITREO. Even better, was this statement: “Retail entitlements worth approximately $7.5 million were traded on the ASX between 15 December and 17 January in a range between 26 cents to $1.75. The volume weighted average price for retail entitlements traded during this period was 88 cents.”
No issuer had ever summarised the outcome of rights trading in this level of detail before and we trust others will follow suit in the future.