There aren’t many successful ASX-listed Gold Coast companies, so we should celebrate the recent emergence of Retail Food Group (RFG), which is now capitalised at about $880 million, surpassing even Billabong, whose value has fallen below $700 million.

RFG was founded in 1989 to manage the Donut King franchise but now bills itself as Australia’s pre-eminent listed franchised food company through its ownership of Brumby’s Bakery, Michel’s Patisserie, Crust Gourmet Pizzas and several coffee chains.

Its most recent completed deal is also the biggest yet, as it agreed to pay $163.5 million up-front to buy the global Gloria Jean’s coffee franchise with an additional $16.4 million over the next two years if it hits performance targets.

RFG bills itself as the “acquirer of choice” in the franchised restaurant business, and investors have ridden the wave from a share price at just 73c shortly after the 2006 float through until the recent record high of $6.

Indeed, those lucky institutional investors who piled into the $40 million placement at $4.80 in October are already enjoying tidy gains of about $7 million, with the stock closing at $5.60 on Monday, based on the bullish predictions for the Gloria Jean’s integration.

The unknown recipients of these placed shares are an example of how the property rights of existing shareholders are diluted by Australia’s highly flexible placement regime, which allows 15% of a company to be sold to non-shareholders every 12 months — without shareholder approval.

The majority of companies attempt to stay sweet with their smaller shareholders after a placement by offering everyone, regardless of size, an opportunity to buy $15,000 worth of stock in what is known as a share purchase plan (SPP).

The $15,000 SPP being offered to about 5000 eligible RFG retail investors closes on Friday and is currently $2.65 million, or 17.7% in the money, assuming it remains capped at $15 million overall.

The rational thing to do is for all 5000 shareholders to apply for the full $15,000, but if that happens there will be $75 million fighting to be allocated just $15 million worth of new shares.

However, retail investors are notorious for not acting in their best interests, the worst example being when less than 10% of AXA Asia Pacific shareholders applied for this SPP in 2009, which was almost 40% in the money on the day it closed.

Faced with large over-subscriptions, quite a few listed companies have chosen to lift the arbitrary cap on their SPPs, especially in 2014.

The decision to expand an over-subscribed in-the-money SPP is one of those rare occasions where a board gets to decide how it treats small shareholders relative to the big end of town.

The RFG board will probably face that choice in the days leading into Christmas. Here are five notable examples of companies that have done the right thing by the little guy in these circumstances:

  • ANZ, 2009: the SPP offer document mentioned a cap of $350 million following the $2.5 billion institutional placement at $14.40 but the bank accepted all $2.2 billion worth of applications from 178,000 holders or some 40% of the register. This remains a record 529% expansion of an SPP.
  • Bendigo & Adelaide Bank, 2014: after a $230 million selective institutional placement at $10.85 to fund the Rural Finance purchase, first announced a soft $50 million cap and $5000 individual limit on the SPP. This was later lifted to $7,500, and all $150 million worth of applications were accepted;
  • Automotive Holdings, 2014: after raising $115 million from institutions at $3.49, attempted to limit the SPP to just $10 million, but this was expanded by 200% to $30 million with no scale-back;
  • DUET Group, 2014: announced a $30 million SPP cap after the latest of a long line of institutional placements but then accepted all $43 million in SPP applications;
  • QBE, 2014: SPP was initially capped at $150 million, but this was expanded by 33.3% to $200 million after a threatened board tilt. Original placement was $650 million at $10.10 a share; and
  • IAG, 2014: announced a $200 million cap on SPP in 2014 but then accepted all $236 million in applications.

Interestingly, long-time RFG CEO Tony Alford is also the largest shareholder, with a 15.9% stake worth about $130 million. It is not necessarily in his interest to be diluted through an expanded SPP, but ultimately the decision should be made by the three independent directors who round out the small four-person board.

*Stephen Mayne is a small RFG shareholder who has applied for the full $15,000 SPP allocation.

Peter Fray

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