People have still got to eat during a global depression and shareholders still like to make a quick buck.

These two themes explain why Wesfarmers has just been hit by the biggest cash deluge a secondary market capital raising has ever delivered in Australia.

With the stock pushing towards $18, the loyal army of 474,000 small Wesfarmers shareholders reportedly lodged applications worth $1.5 billion in the 3-for-7 offer at the knock-down price of $13.50 a share.

Wesfarmers was assuming the take up would be only 15% or $400 million, but this failed to appreciate that the market would embrace last Monday’s better-than-expected profit result which revealed solid progress at Coles.

The AFR has today suggested Wesfarmers is contemplating scaling back the retail pie. However, The Australian’s John Durie predicted that the entire 111 million in new shares would be issued.

This would be perfectly reasonable given that retail shareholders as a class owned about 50% of Wesfarmers and were therefore entitled to spend $2.66 billion buying 197 million new shares in the 3-for-7 offer.

While Wesfarmers failed to provide any facility for retail shareholders to sell their entitlements — something Orica and Australand did in major raisings last year — they did provide a facility for small investors to apply for additional shares over and above their entitlement.

For those shareholders who worked out that the offer was more than 25% in the money by the time it closed at 5pm last night, the logical thing to do was apply for more shares to take up the slack from those who let their entitlement lapse.

The big question now is whether Wesfarmers will accept all applications meaning the $1.5 billion from retail investors would turn the $2.9 billion institutional raising into $4.4 billion overall. This would make it the largest secondary offer in Australian history – trumping the $3.6 billion pocketed by ANZ in 2003 in a 2-for-11 offer to fund its New Zealand expansion.

However, if Wesfarmers does decide to scale back retail shareholders, it will be diluting small investors as a class. Having selectively placed $500 million to US funds management giant Capital Group at $14.25 a share, this would be quite an insult.

It would also send a very strange message to knock back capital after just paying a ridiculous $200 million in underwriting fees to ensure the company got the first $2.9 billion from institutions through the door.

Having upset institutional shareholders such that last year’s remuneration report was voted down, it would be a brave board that turned around and disenfranchised its retail base as well.

Wesfarmers shares tanked more than 5% to a low of $16.90 in morning trade before bouncing to $17.30. Even at that level the company is only capitalised at $11.5 billion — before considering the $1.5 billion offered by retail investors.

With Woolworths capitalised at $34.2 billion, Wesfarmers could be one of the few stocks to rise during these tough times because Australia has the most concentrated grocery duopoly in the world and people have still got to eat during a depression.

· Disclosure: the author is a small Wesfarmers shareholder who did apply for additional shares in the offer.

Peter Fray

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