One of the things that private investors hate is placings made by companies to raise money in which they cannot participate. In other words, the issuance of shares that dilutes your interest in the company when it is not a rights issue and there is no “open offer” alongside. Sometimes those placings are done at a price which is a considerable discount to the open market share price, thus enabling institutional investors to pick up shares at a big discount to what you may have paid for your shares, or less than you can buy them in the market.
On the 14th December, IDOX announced their preliminary results and a placing to raise up to £20.5 million for the proposed acquisition of 6PM. There was no Open Offer included. Incidentally I do have to declare a interest in IDOX as I have been a long-standing investor in the company – indeed this was a “ten bagger” for me until the share price fell after the announcement. My holding is therefore not trivial.
The company has been well managed by Richard Kellett-Clarke who only recently stepped down from CEO to become a non-executive director so I don’t doubt the possible merit of the acquisition. The acquisition is likely to be earnings enhancing. 6PM produces software for medical applications and IDOX already has interests in this area as local government (in which it specialises) are heavily involved in delivering care. But 6PM seems to be more into clinical applications sold to the NHS which is somewhat new.
But that does not mean that a small open offer could not have been included alongside the placing. As it was the placing was completed on the day of the announcement at a price of 60p per share – that’s a discount of 14.3% to the previous days closing price and 3.8% to the average over the prior 20 days. The market offer price at the time of writing is about 66p, so private investors have definitely missed an opportunity while institutions can realise an instant profit.
Having communicated with Mr Kellett-Clarke on this matter his argument for not including an open offer was the necessity to be sure of raising the funds in the timescale required to close the deal with 6PM. Also the costs of producing a prospectus are high. However, I do not fully accept those arguments. An immediate placing to institutions followed by a small open offer for other investors (at the agreed placing price) does not seem impossible to me bearing in mind that the take up by retail investors on such offers is often low (and could be scaled back if excessive). I believe a full prospectus is not required for a smaller share issue.
In essence it’s likely to be about “can’t be bothered”, or “it will cost something” to meet the demands of small shareholders when their main interest is in keeping institutions happy. In other words, shareholders are not being treated equally with larger ones benefiting at the expense of smaller ones. Even larger private investors have been excluded I understand.
If other companies can do it properly (recent examples are AB Dynamics, a much smaller business than IDOX, and Tritax REIT) then why not IDOX?
Now there will be a vote on the placing because this is a larger financial transaction and hence there is a General Meeting scheduled for the 5th January. Shareholders should consider whether they should vote against this transaction on the basis that the directors have not tried hard enough, as I am likely to do.
Roger Lawson
Postscript: I attended the General Meeting on the 5th January in London. The directors and their advisors were present, and one other institutional shareholder representing a VCT (so could not participate in the placing under the new VCT rules).
I initially asked some questions about the merits of the acquisition. The business being acquired does software development in Malta and Macedonia although most of its sales are in the UK. Malta is a good place to do development work as I know from my own experience. But it is no longer as cheap as it once was, hence the Macedonia location. These operations will be kept in place. IDOX is keen to move into medical applications. They already have social care products and their expertise in workflow will be relevant. 6PM, the business being acquired has some clinical products (for HIV, strokes and sexual health specialities) and also some hospital management products). I questioned whether this was a good sector to move into as NHS spending and budgets seem to be constrained at present, but IDOX has confidence they can grow the business. They see opportunity for further acquisitions in this area. I ended up being satisfied that the acquisition makes sense and it looks reasonably priced.
We then moved onto the issue of the placing, without an open offer. One of the advisors claimed that the company was careful to price the placing at a nil discount to the previous share price (it did hover around the 60p mark at the end of November which is what the placing was made at on the 14th December). I mentioned the price rose to 70p before the day of the placing, but he suggested that this was because institutions involved in the placing could not trade during that period. He also suggested that investors could have picked them up in the market at less than 60p, but seemed to recant on that later. In fact looking at the trades put through on the 13th and 14th December, there were none at less than 63p and one would have to be extremely nimble to buy them for much less than 65p. The closing mid price on the 14th was 66.25p and in general it’s been near that level since (the closing price last night (on the 4th January was 68p). So there has been a substantial transfer of value from private investors to institutions.
I pointed out that I could see no reason why a small open offer could not have been included (which would not have required a full prospectus as they are not needed for issues of less than Euro 5 million). The need to be certain of the fund raising, cost and the short timescale required to close the deal to buy 6PM was given as the reasons for not considering an open offer. The advisor expressed concern that any additional fund raising via an open offer (above that specifically required for the acquisition) would imply dilution. But I do not consider that would be significant. The CEO later said to me that it was the institutions who were opposed to including an open offer.
I did get a commitment from the Chairman (Lawrence Vaughan) that proper consideration would be given to this question if they do any further placings.
We then took the vote on a show of hands (which was of course a vote on the “disapplication of pre-emption rights rather than the acquisition so I voted against). The proxy counts were given and there were 1.1 millions shares voted against. As I said to the Chairman, on that basis there were clearly other significant shareholders than me who voted against.
Shareholders in IDOX need to keep pushing on this issue, and at other companies who do placings without open offers alongside. It will be good to raise it at the AGM also because General Meetings of this nature are not well attended.
Roger Lawson
Idox represent a transfer of value to institutional shareholders of around IMO £2 million. The placing was £20 and the discount was 14%.
At Euromoney, there was a transfer of value of IMO between £10 to £26 million, when it placed 13 million shares at £9.75 with institutional investors in a placing. The share traded at £11.91 on Dec 1, and now trade at £11.70. It traded at £11.12 before the announcement and dropped 70p, on the day on the announcement of the placing, to £10.50. This is another example of placings which transfer value from individual investors to institutions, IMO.