Five years after the great post-GFC capital-raising deluge by ASX-listed companies, it is surprising to still come across major companies that are structuring equity issues in a way that deliberately undermines retail investors. DUET Group is a Sydney-based utilities company with a market capitalisation of $3.5 billion and a portfolio of assets that includes gas and electricity distribution businesses in Victoria as well as the Dampier-to-Bunbury gas pipeline in Western Australia. The company was created by Macquarie Group and AMP to bid for privatised Victorian power assets in the 1990s and was floated in 2004. Macquarie has extracted more than $200 million from DUET and its portfolio of assets over the past 15 years, whether by way of capital raisings, management fees, internalisation compensation, transaction advice or debt structuring. And while the Millionaire's Factory is now formally off the register, its long-time infrastructure heavy John Roberts remains a director, and independent chairman Doug Halley also happens to be a former Macquarie executive. Halley has also just taken over the chairmanship of teetering Victorian education provider Vocation after the recent resignation of former Vocation federal treasurer John Dawkins. Unfortunately, it seems that Halley’s record at DUET suggests that he needs to be re-educated on the question of respecting retail investors in capital raisings. There are three fundamental fairness requirements for retail investors in capital raisings:
  1. Raise money on a pro-rata basis that treats everyone the same, but if you have to do a selective institutional placement, always follow up with a share purchase plan for retail investors on the same or better terms;
  2. Understand that retail take-up rates are low, so make sure any pro-rata entitlement offer is renounceable so that non-participants are compensated for their rights through a book build that maximises the price; and
  3. If the entitlement offer is not renounceable, allow participating retail investors the unlimited opportunity to apply for additional shares or so-called “overs”, to take up the slack from their non-participating retail colleagues. This minimises any dilution of retail investors as a class.
Before and after DUET shareholders paid Macquarie and AMP a $96 million divorce fee in 2012, the company specialised in doing selective share placements to big institutional clients of Macquarie and other investment banks. And when it has gone pro-rata, they never make it renounceable to look after non-participants. Here’s the full capital raising record over the past decade: August 2004: floated with the sale of shares at $2.29 raising $258 million. First annual report identified 6378 shareholders. December 2004: 2-for-3 non-renounceable entitlement offer at $2.42 that could have raised $398 million with overs or renounceability but instead produced $352 million, with retail investors leaving most on the table. July 2006: $166 million institutional placement at $2.60 with no follow-up share purchase plan for retail investors. July 2007: $100 million institutional placement at $3.50, plus $244 million 1-for-7.13 entitlement offer with unlimited overs that was over-subscribed leaving retail only collectively diluted by the placement. May 2009: $131 million placement at $1.30 plus a 1-for-6.25 non-renounceable entitlement offer at $1.30 raising an additional $133 million. The retail offer had unlimited overs and investors who applied received 3.5 times their entitlement. August 2011: $277 million under-written non-renounceable entitlement offer at $1.52 with unlimited overs. Underwriters picked up 22.2 million of the 67.57 million shares offered to retail so there was dilution. September 2013: $100 million institutional placement at $2.06 with no SPP for retail investors. January 2014: $100 million institutional placement at $2.04 with $30 million capped SPP that was subsequently expanded to $43 million after pressure from the Australian Shareholders’ Association. The SPP pricing was $2.02 so this was the first time retail investors benefited relative to institutions from a DUET capital raising. It’s hard to think of another ASX100 stock that has done five institutional placements in less than 10 years. And they’ve been big too, raising $597 million in total. After being loudly criticised for doing two separate placements in 2013-14, DUET finally got with the program and announced a $395 million entitlement offer last month. However, once again it shafted retail by failing to make it renounceable. Even worse, the ability to apply for additional shares or “overs” was limited to just 50% of an investor’s entitlement. This will guarantee a retail shortfall that will probably see value transferred from ordinary DUET investors to the joint underwriters, Macquarie and UBS. These two big gorillas of the Australian financial scene have done more than any other investment banks to dilute value from Australian retail investors in capital raisings. And over 10 years and nine capital raisings, DUET is the best case study in the top 100 on how not to treat retail investors.