The very same mum and dad shareholders who delivered Scott Morrison three more years in office last year on the strength of their franking credits are now being shafted by the big end of town, after Treasurer Josh Frydenberg agreed to change Australia’s capital raising rules
After lobbying by the ASX, ASIC and some corporate lawyers close to Wall Street investment banks, the government last month agreed to a temporary rule change where ASX-listed companies can now place up to 25% of their shares with non-shareholders, up from the previous limit of 15%.
It’s an emergency measure due to the COVID-19 crisis and has triggered a wave of new capital raising deals as companies battle to survive.
The business commentariat have been up in arms. News Corp’s Terry McCrann has written four columns lashing the proposal, Alan Kohler gave it a spray in The Weekend Australian and even The AFR’s Chanticleer columnist opined about how Cochlear’s $930 million capital raising had ripped off its 34,000 retail shareholders while the big end of town made out like bandits.
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Placements are bad because they breach the fundamental concept of property rights by diluting existing shareholders. Participants also have to commit to the deal in 24 hours meaning that any incumbent shareholder who is suddenly cash-strapped can quickly can find themselves diluted without any compensation.
A big stoush is emerging across the ditch which highlights how this works.
The publicly listed Auckland Airport has never much liked having the City of Auckland as its largest shareholder with a 22.4% stake. Smaller parcels used to be owned by a variety of different Auckland councils before a city wide council was created out of an amalgamation in 2010.
The mega council, which is even bigger than Brisbane City Council and has NZ$55 billion in assets under its control, has never been offered, or even asked for, an Auckland Airport board seat.
This lack of board representation meant that when Auckland Airport pulled the trigger on a NZ$1 billion selective placement last week, the council was given just 24 hours notice to decide whether to invest NZ$250 million to avoid being diluted.
I sent an email to all 21 City of Auckland councillors asking about this situation, and it turns out that the councillors weren’t even consulted about the decision not to invest.
With Auckland Airport shares closing at A$5.61 last night (NZ$5.89) on the ASX, the opportunity cost from the council’s decision not to take up its NZ$250 million entitlement to retain its 22.4% stake has now hit NZ$66 million, or some 26.4%. It was negligent to mismanage its assets in this way and the councillors are now debating options to redress the situation.
There has been a proposal that they lawyer up and go back to Auckland Airport requesting a second opportunity to invest NZ$250 million at the placement price of NZ$4.66.
The shafting of Auckland ratepayers highlights how the Australian and New Zealand capital raising system is the wild west compared with the UK, where public companies cannot place more than 5% of their stock to non-shareholders each year and capital raisings tend to be pro-rata renounceable entitlement offers.
This means existing shareholders are guaranteed to retain their percentage stake in a company and if they don’t want to participate in a capital raising, their entitlement is renounced and sold off to the highest bidder, generating a premium to the offer price which is paid to the non-participating shareholder as compensation.
Moving from New Zealand to our nearest northern neighbour Papua New Guinea and there was another dreadful example of a major capital raising rip-off last week, this time involving Oil Search, which has a monopoly over PNG’s oil and gas developments.
The Abu Dhabi sovereign wealth fund Mubadala was the largest Oil Search shareholder with a 12.9% stake until it declined to participate in a snap $1.16 billion capital raising.
When the Oil Search board decided it needed fresh capital to pay down debt and deal with the crashing oil price, it came up with a super-sized $760 million placement twinned with a $400 million non-renounceable entitlement offer at the heavily discounted price of $2.10 a share.
The 52-week high is $8.30.
Abu Dhabi has subsequently been diluted down to below 10% without receiving any compensation. And with the shares closing at $2.75 yesterday, those institutional investors who committed to buying the $1.16 billion in new shares are already enjoying paper gains of $359 million, or 31%.
Oil Search’s 42,000 retail shareholders have also been monumentally shafted. Two weeks ago they collectively owned 20% of the company but they’ve only been offered $80 million worth of the $1.16 billion in new shares at $2.10 because the $760 million institutional placement to the clients of under-writers Macquarie Group and Goldman Sachs was such a huge proportion of the overall raising.
We’ll see what the retail take up is later this month, but whatever happens, the only winners here are the overpaid investment banks which underwrite these capital raisings, and their institutional clients who rip off big and small shareholders alike — snapping up new cheap shares at a discount without any regard for the wellbeing and ownership rights of the existing shareholders.