ban non-renounceable issues?

Frith again explains the shoddy and disgraceful way existing security holders have been treated while Rowsthorn gleefully lines his own pockets.
I do not hold AIO but i think this is a dark cloud that could cross other companies .
Ban non renounceable issues ?

Asciano equity raising dilutes its security-holders
Bryan Frith | June 19, 2009
Article from: The Australian

SUCCESS, like beauty, is in the eye of the beholder. Asciano considers its equity raising was successful because institutional demand was so strong that it was able to increase the underwritten component by $350 million, or 15 per cent, to $2.35 billion.

If quantum was the only prism, then the raising was a success, and it enabled the group to further reduce its heavy debt burden. But that success was attained at the expense of existing security-holders.

The raising was structured to ensure existing security-holders were savagely diluted. The increase in the size of the offering only rubbed salt into the wound because it further diluted the holders.

And that dilution means more than simply a decrease in the level of ownership of the diluted holders. It also means a direct, and significant, reduction in the value of their holdings.

More accurately perhaps, it means a massive transfer of value from the existing holders to the privileged few who participated in the hefty non-pro-rata placements and/or took up the shortfall to the pro-rata component of the raising.

The institutional demand to participate in the non-pro-rata placements was so strong precisely because the successful subscribers would secure value that should rightly belong to the existing security-holders.

The rush to profit at the expense of the unitholders was the reason that Asciano was able to increase the size of the institutional offering by $350 million. In this case, there is an additional highly objectionable feature: all of the existing security-holders except one -- the chief executive, Mark Rowsthorn -- stand to be diluted.

Instead, Rowsthorn is being offered a special deal, what amounts to a free option to purchase sufficient additional securities to maintain his existing 10.2 per cent holding. That would also be at the expense of some dilution of all other securityholders. It's therefore difficult to view the raising as a success when seen through the prism of the security-holders.

The capital raising involves four tranches: initially a $769m 1-for-1 accelerated non-renounceable entitlement offer; a $231m unconditional placement and a $1bn conditional placement to institutional investors; and a $151m conditional placement to Rowsthorn.

The entitlement offer and the two institutional placements are underwritten by UBS and RBS while the placement to Rowsthorn is not underwritten.

All of the issues are at $1.10 a security. The ASX listing rules specify that companies cannot, in any 12-month period, raise more than 15 per cent of the existing capital on a non-pro-rata basis without first obtaining the approval of the security-holders.

But for accelerated issues the ASX bends the rules somewhat. It allows the underwritten portion of such offerings to be included in the 15 per cent formula, because of the certainty that the securities will be offered.

Thus the $231m unconditional placement equates to 210 million securities, which is equivalent to 15 per cent of the capital doubled by the 1-for-1 entitlement issue, but 15 per cent of the existing capital.

Beyond that point security-holder approval, so the $1bn institutional placement needed approval, and it is now $1.35bn needing approval.

In aggregate, the institutional placement raised $1.581bn, slightly more than double the amount to be raised by the entitlement offering. That demonstrates the degree of dilution to the existing holders.

The value destruction to existing holders is increased by the current trend to replace renounceable offerings with non-renounceable issues, at a steep discount to the market price.

In the case of renounceable rights issues and entitlement offerings, the discount is not value dilutionary because holders who don't participate can either sell their rights on market, or have their entitlement sold via a bookbuild and the proceeds distributed to them.

But in non-renounceable offerings the shortfall goes to the underwriters and sub-underwriters, and the greater the issue discount the greater the value dilution of the holders who don't participate.

Asciano's $1.10 issue price was a discount of 40 per cent to the previous market price of $1.83 and a discount of 25 per cent to the TERP (theoretical ex-rights price) of $1.465. Normally the security price would sell at around TERP after the securities went ex-rights.

But, the formula is distorted by the huge non-pro-rata placements. If that is taken into account the average diluted value is $1.30 a security -- 11.25 per cent below TERP. And that's exactly where Asciano shares sold when trading resumed after completion of the placements bookbuild.

A holder of 100,000 Asciano had stock valued at $183,000 prior to the bookbuild.

At TERP the value would be $146.500 -- a fall in value of $36,500, or 20 per cent, but at the average value of $1.30 the loss is $53,000, or 29 per cent.

And it's a real loss to the diluted holders because that's where Asciano securities are trading. So even if the existing holders took up their entitlement they have had a further 11.25 per cent wiped away because of the placements.

Of course, the privileged institutions who get to take up the shortfall at $1.109 a security still make a profit of 20c a security, or almost 19 per cent, at the market price of $1.30.

Asciano is not the only company to disadvantage security-holders by security-holder raisings non-renounceable.

Non-renounceable issues amount to companies holding a gun to the head of security-holders: take up the entitlement or suffer a transfer of value to the underwriters and sub-underwriters. Boards who sign off on such coercive offerings should consider whether they are acting in the best interests of the existing security-holders.

The board of OZ Minerals faced this issue when considering 11th-hour recapitalisation proposals as an alternative to selling to China Minmetals all of the company's assets other than the Prominent Hill copper/gold mine. All of the proposals would have secured the company at an undervalue, but the board favoured the Minmetals transaction because it didn't dilute the existing holders, whereas the recapitalisations would have seen the value largely transfer to a small group of new shareholders.

Ultimately, Minmetals put the issue beyond doubt by increasing the value of its proposal.

Contrast the Asciano raising with Rio's $19bn capital raising.

It's a traditional renounceable rights issue because Britain doesn't allow accelerated offerings, let alone non-renounceable issues.

Not only are the rights to the issue now trading on the stockmarket, but Rio also plans a back-end bookbuild after completion of the offering, under which the underlying shares of holders who, for whatever reason, don't sell their rights or take up their entitlement, will be sold in a bookbuild and the proceeds distributed to those holders.

That's equitable to all holders and protects the interests of those holders who fail to do so.

The only other time such a mechanism has been adopted was in the $3.6bn renounceable rights issue by ANZ in 2003 to help pay for its $5.4bn acquisition of the National Bank of NZ.

On that occasion the back-end bookbuild realised $54m for those holders who had failed to protect themselves, which would otherwise have gone to the underwriters. As to Asciano, the $350m increase in the size of the institutional placement means the price tag of Rowsthorn's no-dilution option rises from $151m to $194m.

Aggregating the two would mean a further 12 per cent dilutive increase in the capital.

With the $84m to take up his entitlement, Rowsthorn would need to find $278m if he is to avoid dilution. That will encourage speculation that he will have to borrow, perhaps taking out a margin loan, if he wants to avoid any dilution and that is likely to encourage short selling, which would put downward pressure on Asciano's security price.

How would that be in the interests of the security-holders?