Abacus Property Group is an old-school commercial property investor with an ageing blue-blood board and an attitude to retail investors that reflects a bygone era.
It’s hard to reach any other conclusion when you consider the structure the company adopted for its recently concluded $121 million capital raising, which fell $13.4 million short at $107.6 million.
The biggest loser in Australia’s highly flexible capital raising system is the apathetic retail investor who fails to take up a discounted entitlement offer, and therefore gets diluted.
Billionaire Gerry Harvey recently admitted to Crikey that rescinded value left behind by non-participating retail investors used to be the old way that under-writing brokers made much of their margin. Harvey’s new formula was to take the profit for himself, as Crikey explained here.
Institutional shareholders and investment banks historically made plenty out of these usually voiceless victims, but more enlightened companies have now moved to a model of making offers renounceable, which fairly compensates non-participants.
Abacus Property Group may be an ASX 300 company capitalised at $1.5 billion, but it has not bothered with renounceability in its latest one-for-12 offer at $2.82. However, it has also failed to offer an unlimited opportunity for retail investors to take up the shortfall left on the table by their investing colleagues.
Instead, retail investors were limited to just 50% of their entitlement in “overs”.
Neil Summerfield, the investor relations boss at Abacus, claimed in a phone call to me last week that such a practice was the “market norm”.
A subsequent letter I sent to the board, which includes 85-year-old director Malcolm Irving, pointed out that wasn’t the case and requested a change to the terms to get with the true market norm with non-renouceable offers, which is “unlimited overs” for other retail investors to take up the shortfall.
It’s not as if the Abacus board wasn’t aware of chronic retail dilution.
One of its veteran directors, Bill Bartlett, sits on the Suncorp board and would be well familiar with the terms of its non-renounceable $1.05 billion capital raising at $4.50 in March 2009.
Even with unlimited overs, Suncorp’s retail investors were typically apathetic and non-engaged when they only took up $191 million of the available $502 million shares on offer. When you include the $390 million institutional placement at $4.50, based on last week’s Suncorp share price of $13.72 retail dilution on this capital raising alone amounts to $1.437 billion, before considering dividends.
Seeing as the retail component of the Abacus offer was not under-written, there should have been no contractual implications with under-writer JP Morgan in making a late change to the requested “unlimited overs”.
Alas, a letter came back from Summerfield claiming: “We cannot change this as some retail security holders have already accepted the offer as part of the early retail acceptance option and it would disadvantage them.”
There would have been nothing stopping these alert investors topping up their BPAY application once unlimited overs was announced.
Instead the result, which was announced yesterday under the misleading headline “Successful completion of Retail Entitlement Offer”, meant the $24 million retail offer received just $10.7 million worth of applications, including the 50% capped overs component.
This left $13.3 million worth of shares at $2.82 unsubscribed. The stock closed last night at $2.92, meaning non-participating shareholders have collectively passed on $471,000 in paper profits.
These shares should have been auctioned off to the highest bidder with the premium returned to non-participating shareholders. That’s what fellow ASX 300 company Slater and Gordon will do on April 23 at the conclusion of its current $282 million retail offer.
With Slater and Gordon, whose shares have slipped to $7.34 this morning, it looks like its non-participating retail shareholders will receive less compensation than non-participating “sophisticated” investors who cleared their 19.2 million shortfall shares at a healthy $7.50 last week.
But at least they will get something, unlike the majority of the 8000 Abacus shareholders who will receive nothing.
Interestingly, non-renounceable Abacus-style offers with limited overs tend to occur when there is a large or controlling major shareholder, in this case the South African billionaire Nathan Kirsh, who owns 49% of Abacus. The retail shortfall will lift this closer to 50%.
Other examples include the following:
Australand, 2009: overs limited to $40,000 worth of shares or one times the entitlement, which left the $95 million retail offer $14.7 million short and benefited major shareholder CapitaLand.
Virgin Australia, 2013: overs limited to 40% of entitlement and finished $51.6 million short, benefiting under-writers and major shareholders Etihad, Singapore Airlines and Air New Zealand, which snaffled an extra 3.88% of the company. The profit today on these shares is worth $23 million.
All of this comes down to a property rights question, and it is remarkable that no politician appears interested in fixing a system that shafts ordinary small Australian investors and benefits largely foreign investment banks and their big-end-of-town institutional clients.