Next time private equity comes knocking with an “attractive” initial public offering (IPO) for retail investors, the smart move would be to give it a wide berth.
What else is to be concluded from car crashes we have now seen from Dick Smith, Spotless and Myer in recent years. Even Nine Entertainment Company has been underwhelming since returning to the ASX from the bosom of US vulture funds.
However, it is the antics of private equity in dealing with a half-privatised company that has produced the most jaw-dropping revelation in this messy week of bad news from now-notorious private equity offspring, Spotless and Dick Smith.
When Sir Peter Cosgrove was a director of Brisbane-based engineering services firm Cardno, from 2007 until early 2014, it was a well-governed outfit that had generally performed strongly for investors.
Then, after some market wobbles, private equity firm Crescent Capital came along in September this year with an unsolicited proportional takeover bid at $3.45 a share, which delivered it 39% of the company — enough to execute a board coup.
However, with 61% of the company still owned by independent shareholders, this shouldn’t mean that notions of fairness are dispensed with.
Crescent Capital is currently rolling out a capital raising the likes of which we haven’t seen before from an ASX-listed company.
By now, Crikey readers would be familiar with our line of arguments about how retail shareholders have been disadvantaged by Australia’s anything-goes capital raising system.
The principles of treating all shareholders equally and having capital raisings that are renounceable for non-participants are now reasonably accepted by market practitioners.
Which is what makes this week’s Cardno raising all the more troubling.
We finished last week with Cardno shares trading around $2.35. Lo and behold, the company on Monday announced the most heavily discounted pro-rata offer I can recall: a 1-for-2.75 at just $1 to raise $78 million.
However, it was the under-writing arrangements and different treatment of retail shareholders that was most unusual.
Crescent Capital started with a 39% stake in Cardno, but this could rise to 44.44% because it is the sole under-writer of the entire heavily discounted retail offer.
However, the retail offer is not renounceable; so the thousands of small shareholders who don’t bother to subscribe for new shares at $1 will see their entitlement snaffled by Crescent. With Cardno shares currently trading at $1.74, this will be money for jam for the private equity firm, which has board control of the group. In this regard, it is no different to what Gerry Harvey did earlier this year, although the discount is much bigger so non-participants will be more heavily diluted.
There are also similarities here with Virgin Australia’s controversial 2013 capital raising, which lead to a Takeovers Panel hearing as the three foreign government-controlled airlines snaffled an additional 3.88% in the company from non-participating retail investors.
However, the Cardno raising is even worse than what Virgin did.
For starters, as compensation for the lack of renounceability, retail investors have been given a chance to apply for “overs”, but Cardno has limited this to just 25% of their entitlement — whereas Virgin offered 40% overs.
Cardno’s institutional investors were also offered a bookbuild for their rights with compensation. At Virgin and Harvey Norman, it was non-renounceable for everyone.
For some unfathomable reason, the ASX has allowed Cardno to conduct a shortfall bookbuild for non-participating institutions, which “attracted strong demand”, but then not disclose the price achieved or the amount of compensation being paid.
If non-participating institutions are getting compensated, then the same should apply to Cardno’s 15,000 retail shareholders.
In other bad news for Cardno, today it was also ditched from the ASX 200 as S&P released its quarterly index changes.
It was also bad news for Slater and Gordon, which has been replaced by Sirtex in the only change to the ASX 100.