advertising UBS way off the money on Arrium raising
PUBLISHED: 9 HOURS 53 MINUTES AGO | UPDATE: 4 HOURS 38 MINUTES AGO
TIM BINSTED
If it’s a truism the market is always right, it looks like Arrium and underwriters UBS got something wrong in the steel and mining group’s $754 million capital raising.
The stock was crushed when it resumed trading on Thursday after a very lacklustre response to the institutional portion of the raising.
Institutional investors took up just 79 per cent of their rights, one of the worst take-ups for a big rights issue in the past decade.
UBS managed to place the shortfall in a book-build at the underwritten price of 48¢. But UBS and its sub-underwriters face the prospect of becoming substantial shareholders in their client if the stock doesn’t recover for the retail part of the raising.
On Friday, Arrium shares shed another 6 per cent to 37.5¢, a fresh record low since the company was spun out of BHP as OneSteel in 2000.
At 37.5¢, the stock is trading well below the theoretical ex-rights price (TERP) of 56.5¢. TERP is the theoretical value of the stock adjusting for the impact of the raising. Incoming Arrium chair Jerry Maycock emerged as a buyer in the sell-off, snapping up 250,000 shares for $95,000 according to a filing on Friday.
The $298 million retail offer opens on Monday and closes on October 8, after which there will be a book-build for any shortfall in the raising.
Retail investors tend not to take any action until the last two or three days of a rights offer and there is still time for Arrium shares to recover. Of course if the stock stays below the 48¢ offer price it makes no sense to take up the rights. That raises the prospect that sub-underwriters will look to hedge their risk by short-selling Arrium, putting further pressure on the share price. The whole deal has been hit by a negative spiral with origins in the surprise nature of the raising. The market hates surprises, and a monster equity raising just three weeks after Arrium’s result, when all seemed rosy, is something of an ambush.
No-one could predict the rapid plunge in iron ore prices that drove the raising, but anyone running a mining business should be prepared for those scenarios, rather than reacting to them. Investors were then treated to a flood of negative analyst reports as UBS scrambled to find buyers for the institutional shortfall.
The raising has been well structured in that it is renounceable and the rights are tradeable.
But if UBS and friends get stuck with a chunk of stock it looks like they got the pricing wrong.
A 15 per cent discount to TERP may have been too aggressive, given the uncertain outlook for iron ore and the surprise nature of the raising.
BlueScope Steel offered a 22.5 per cent discount to TERP when it launched its distress raising in 2011.
UBS has been king of Australian equity capital markets for years. The bank has been number one in local equity raisings every year in the past 8 years and Simon Cox’s team has consistently made sure UBS was on the big ticket floats such as Nine Entertainment, Spotless, and Veda.
In 2008, UBS Australia struck a deal with head office in Switzerland to ring-fence the bonus pool of top local staff, arguing their performance in Australia justified special treatment.
With bonus time now just around the corner the running joke is UBS bankers will be paid in Arrium stock.
ARI Price at posting:
37.5¢ Sentiment: Buy Disclosure: Held
