Brian Gaynor: Rights issues a fairer bet for investors

Capital-raisings have been one of the big stories this year as a large number of companies have gone to the market to shore up their balance sheets.

These equity-raisings, which have generated more than $50 million in fees for the investment community, have created their fair share of controversy.

Many Fletcher Building, Freightways and SkyCity shareholders were upset because the vast majority of new shares were issued through an institutional placement.

Investors have done particularly well from Fletcher Building as the placement shares were issued at $5.35 compared with yesterday's closing price of $8.38.

Nuplex and Fisher & Paykel Appliance directors were criticised for having too much debt and waiting too long before they raised new equity. Both companies' share prices dropped sharply before they completed their highly dilutionary rights issue.

The current Pyne Gould Corporation six-for-one rights issue has generated a huge amount of media attention because of a related party transaction, the inability of directors to clearly articulate a timetable for Marac's transformation into a bank and the sharp decline in the group's share price.

The accompanying table contains a list of 12 NZX-50 Gross Index companies that have had capital-raisings this year and the amount of money raised through rights issues, placements, share purchase plans and post-issue top-ups.

These 12 companies have raised, or are in the process of raising, $1.91 billion with rights issues comprising 44.9 per cent of the total raised, placements 42.9 per cent, purchase plans 9.3 per cent and top-ups the remaining 2.9 per cent.

Rights issues are the fairest because they allow all shareholders to participate and those who don't want to can sell their rights.

Investors in this country are treated slightly more fairly than their Australian counterparts as 40.4 per cent of the A$70.5 billion ($85 billion) of new equity raised on the ASX in the June 2009 year was through rights issues compared with 44.9 per cent by NZX companies in this calendar year.

In the June 2008 year only 35.5 per cent of the A$34.6 billion of new equity raised through the ASX was in the form of rights issues.

Companies argue that it is quicker, easier and cheaper to raise money through institutional placements and these don't have a negative impact on a company's share price.

Advocates of rights issues argue that they are much fairer and allow all shareholders to participate equally.

The three big companies that have had placements and purchase plans in 2009 have had better sharemarket performances than Fisher & Paykel Appliances, Nuplex and Pyne Gould Corporation.

This is how these six companies have performed in 2009:

Fletcher Building's share price started the year at $5.74, it had its placement and purchase plan at $5.35 and its shares closed yesterday at $8.38.

Freightways' shares opened at $3.20, its issue was at $2.44 and its share price is now $3.02.

SkyCity started at $3.12, its issue was at $2.61 and the share price is now $3.28.

By contrast Nuplex shares, adjusted for the one-for-four split in June, started 2009 at $12, the company had a seven-for-one rights issue at an adjusted 92c a share and its share price is now $2.42. Shareholders that took up their entitlement have done relatively well but those that either sold their rights or let them lapse have suffered big losses. The issue was 4.1 per cent undersubscribed, with shareholders who left their 23.6 million new share entitlement lapse experiencing a capital loss of around 80 per cent since the beginning of the year.

Fisher & Paykel Appliances' shares opened this year at $1.35, it had a one-for-one rights issue at 41c and its latest price is 66c.

Pyne Gould shares started 2009 at $2.60, its six-for-one rights issue at 40c is now underway with its share price only slightly above the issue price.

There are arguments for and against placements and rights issues but the best way to look at the debate is that a well-timed and well-run rights issue is far superior and fairer than an institutional placement.

The problem with the Nuplex, Fisher & Paykel Appliances and Pyne Gould rights issues is that they were badly timed and could have been better organised and communicated.

For example, Pyne Gould completed the highly controversial purchase of a company owned by one of its directors just before the rights issue announcement, it gave investors just a few hours' notice for a 5.15pm presentation on the $270 million issue and chairman Sam Maling became agitated when asked about the timing of Marac's transformation into a bank.

Maling wouldn't give a straight answer.

He indicated that if parties were willing to underwrite and sub-underwrite the company's huge capital-raising then this should give investors full confidence that Pyne Gould would achieve its objectives.

By contrast AMP NZ Office Trust had a very successful nine-for-20 rights issue at 65c a unit and Kiwi Income Property Trust had a placement and purchase plan at 87.9c a unit.

AMP NZ Office Trust units opened the year at $1 and they are now trading at 85c.

Its rights issue had a 4.7 per cent shortfall but unit holders that took up their rights are just slightly down, on a capital basis, since the beginning of the year. The Kiwi Income Property Trust placement and Unit Purchase Plan was particularly well organised, with investors given the opportunity to have one-on-one meetings with chief executive Chris Gudgeon and chief financial officer Gavin Parker.

This approach worked as Kiwi Income Property Trust units started the year at $1.01, the new units were issued at 87.9c and they closed yesterday at $1.04.

Capital raisings should be well organised and planned because the issuers pay substantial fees to investment bankers, underwriters and sub-underwriters.

The most expensive raisings this year, in terms of fees, are as follows:

Pyne Gould is expected to incur fees of $13 million with First NZ Capital as lead manager and underwriter.

Fletcher Building $11 million (Goldman Sachs JBWere & Macquarie).

AMP NZ Office Trust $6.2 million (First NZ Capital).

Nuplex $6 million (First NZ Capital).

SkyCity $4.9 million (Goldman Sachs JBWere).

Fisher & Paykel Appliances $4.3 million (Deutsche Bank & First NZ Capital).

These fees contain other items, including legal costs, and the underwriters pass on fees to sub-underwriters.

Another point worth noting is that shareholders have been able to apply for over-subscriptions in a number of rights issues.

Tower had a 9 per cent take-up entitlement shortfall and shareholders that applied for over-subscriptions received 5.5 million shares at $1.34.

Skellerup also had an over-subscription facility but Pyne Gould does not.

The latter is expected to have a shortfall closer to 10 per cent than 5 per cent and its post-issue share price performance will be greatly dependent on the attitude of the sub-underwriters that end up with the shortfall.

Pyne Gould shareholders will be hoping that Maling is correct when he argues that the underwriter and its sub-underwriters have full confidence in his company's long-term strategy.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management and a Fletcher Building shareholder.