A Capital Stuff-Up - they sold less than implied in the main table of the substantial notice
I was troubled by Capital's release to the ASX on 8 Feb (letter dated 7 Feb), but didn't have enough info to sort it out. Their subsequent US SC13G form filed on 14 Feb makes it look like there was a semi-stuff up in the numbers reported to the ASX and that they did not reduce from 42,591,080 (shares and ADS share equivalents) to 37,605,700 (shares only) but actually held a total of 39,627,450 (shares and ADS equivalents - as mentioned on the last page of the filing).
To be clear, some of their numbers are correct, but there's an error in the main table on page 1 of the form 604 that overstates their initial number of shares and ADS equivalents by double counting the ADSs. This overstates their initial voting power by 0.4784% and overstates their initial number of shares by 2,264,000 (the number of ordinary shares represented by 452,800 ADS).
That overstatement makes it look like they have reduced their number of shares and voting power by significantly more (2.26m more) than the 2.96m shares and ADS equivalent shares actually sold.
The US SC13G form makes it clear that the total beneficial ownership was 42,491,080 shares and that "shares reported include 452,800 American Depositary Shares". Note that the ADSs amount to 2,264,000 ordinary shares on a 5:1 conversion.
The SC13G was lodged on 14 Feb, but it was for their holding as at 31 Dec 2018.
The dates are also interesting as it implies the shares were sold after 31 December 2018 and before 7 Feb 2019 - I suspect most of them were sold around January 29th, 30th and 31st - particularly the 30th when 1.79m shares traded and the price closed at $A1.21 (Capital's average price was $1.215 and VWAP on those 3 days was $1.29, $1.23 and $1.19). Therefore, they sold zero (net) shares from 7 March 2018 (the date of the previous ASX substantial notice, with the same number of shares as the 31 Dec US filing) until 31 Dec 2018. The weird thing about this is the price for the ADSs was $8.00 - which only occurred briefly in early November 2018 and previous to that in late Sep-early Oct 2018.
(It is also notable that short selling has dropped dramatically since the 31st of January and it is possible that Capital's custodian banks were lending stock and that has now been recalled for the sale and is now no longer available for lending. I discuss this further in the "Bottom Line" section.)
Capital's total 42,591,080 share holding was then quoted in the ASX notification as the "before" figure for the substantial shareholder notice (remember that includes the ADSs). They then included the ADSs AGAIN in the ASX form - double counting the "before" amount by the number of ADSs.
They then disclosed selling 2,721,380 shares and 48,450 ADSs (totalling 2,963,630 shares and equivalents) and said their resulting holdings after the sale were 37,605,700 shares and 404,350 ADSs - for a total of 39,627,450 shares plus equivalents.
So, 42,591,080 less 2,963,630 leaves them with 39,627,450 shares and ADS share equivalents.
That is they reduced from 9% of the company (shares and ADS equivalents) in March 2018 (based on 473.2m shares on issue at the time - March 2018) to 7.95% (shares and ADS equivalents) of the company now (based on 498.626m shares on issue now). That percentage agrees with adding up the 7.5419% they quote for their ordinary share holdings AFTER the change in the number of shares, plus the 0.4055% they quote for their ADS holding AFTER the change.
Almost half of the % reduction is due to the extra shares MSB has issued in the past year (mainly to Tasly and NovaQuest, but also some exercise of options etc). That is, even if they had not sold anything, their holding would've dropped from 9% to 8.54%.
So, they only sold 2,963,630 shares and equivalents or 0.59% of the current number of shares on issue, the rest is a technicality because the number of shares increased, and a stuff up by Capital in double counting the ADRs in the BEFORE part of the ASX notification.
The current holding is in 2 Capital accounts - one holding 30,755,583 shares and ADS share equivalents or 6.17% of issued shares; the other holding 8,871,867 shares and ADS share equivalents or 1.78% of the company. Add those together and you get the total of 39,627,450 (derived 4 paragraphs above) and a total % holding of 7.95% (3 paragraphs above).
It may be that these two accounts cover a number of subfunds, and that the fund which sold around the end of January has finished selling - but it is worth keeping an eye on these numbers in the event of any other substantial shareholder notices.
As a final check - note that they have two different custodians -
The ADSs are held through Cede & Co and are in the two accounts amounting to 1,864,000 and 157,750 ADS share equivalents - a total of 2,021,750 shares or 404,350 ADSs - which is exactly what they quote in the AFTER part of the ASX form
The shares are held through State St Bank North Quincy and the two accounts hold 28,891,583 and 8,714,117 which total to 37,605,700 quoted in the AFTER part of the ASX form for the number of shares held.
Add the ADS share equivalents and the number of ordinary shares and we again get 39,627,450 (as above).
Stuff-Up Number 2
I don't think they realised the impact of the change in the number of shares on issue when they calculated how many they were able to sell and remain below the 1% disclosure level. It looks to me suspiciously like they said "how many shares are on issue?", the answer is currently 498.6262m - so they said "OK, let's make sure we don't reduce the holding by more than 4,986,262 versus our last substantial notice in March 2018". So, I think they said "how many shares did we start with" - answer was 42,591,080 (but remember this included the ADSs), then they said "how many shares have we got now" - answer was 37,605,700 (NOT including ADSs). That was a reduction of 4,985,380 - apparently 882 shares less than the disclosure threshold. Unfortunately, it appears that they may not have realised two error - firstly the double counting of the ADSs in the previous year, and secondly the impact of the higher number of shares on issue. These two factors nearly cancelled each other out - but not quite - and that means that they actually went slightly over the reporting threshold and reduced their holding by 1.05% instead of just under 1% as I think they intended.
Bottom Line - and maybe some implications for the odd moves in the net short position
It is very important to know what is going on with major holders. It would be a big hit for the shareprice of MSB if Capital, M&G, The Prof or Thorney were to sell their entire line.
That's why it's important to understand Capital's substantial shareholder notice. Volumes have been light since they sold in late January and there doesn't appear to be any follow up selling from them. I think it's pretty clear they intended to keep their selling below 1% of issued shares but they may have made a couple of miscalculations, and when they realised, they put in a late substantial notice (5 or 6 business days after the selling), under normal circumstances a substantial should go in within 2 business days.
Now that we can understand how the figures are made up, we can watch any future notices to see what's happening. I must admit, their original notice didn't seem to make sense (in terms of how the numbers added up), but their notice could be read that this reduction in the MSB % holding was possibly outside the ordinary course of their management "Neither CGC nor any of its affiliates own shares of Mesoblast Limited for its own account. Rather, the shares reported on Form 604 are owned by accounts under the discretionary investment management of one or more of the investment management companies that make up CGC" - alternatively, you could say that's a statement of the bleeding obvious and they just got caught out trying to sneak the holding down by a bit under 1% but slightly miscalculated - I guess we'll see in coming months.
Anyway, the sale was only 2.72m shares (probably in late-January 2019) and 242,250 ADS ordinary share equivalents (probably done between late September to early November 2018). That's only 0.59% of the current issued shares and is less than the 3.5m shares the short interest has been bouncing up and down in recent days (there could even be a link there - perhaps the State St Bank of North Quincy had been lending some of Capital's stock and has now recalled it after the shares were sold). The total volume that went through the Aussie market in the last 3 days of January was 3.7m shares - so the Capital selling probably explains the weakness in the share price - falling from over $A1.30 to $1.175 - and it has stayed around the $1.17 level ever since.
If Capital sells more stock, they would not have to disclose the next 1% until they sell another 4.987m shares.
During February there has been almost no movement in the share price, the market turnover has fallen to less than 600,000 shares per day and the gross shorting has fallen to just over 50,000 shares per day (down 70% from a couple of months ago). Gross Shorts as a % of daily turnover have halved to 8.2% in February and the shorting pool dropped to less than 600,000 shares available in total last week (and is still there today). Watch this space...It feels like the lull before the storm!
Expand
(20min delay)