Under the Companies Act 2006, pre-emption rights allow existing shareholders the ‘right of first refusal’ when new shares are issued. According to 561(1) of the 2006 Act, shares cannot be offered to another person until an offer has been made (on the same or more favourable terms) to each existing shareholder, and any time limit given for the offer has expired.
At its core, this enables such individuals to protect their existing shareholding against further dilution of their shares – but typically in proportion to the shareholding owned.
The Companies Act has protections for minority shareholders for a reason. Companies can (in normal circumstances) get approval at their AGM to issue a limited amount of new equity.
Ocado is not bust. It has a £14bn market cap and debt of only £558 million at the end of last year (source https://www.hl.co.uk/shares/shares-search-results/o/ocado-group-plc-ordinary-2p/financial-statements-and-reports). Ocado is in fact booming and needs some more cash to invest in more warehouses.
Ocado, advised by Goldman Sachs, JP Morgan and Numis, has raised £1bn made up of £650 million placing of shares to institutions and £350 m of debt and £7.1m of shares via the retail offer via Primary Bid.
They say “Prior to launch of the Placing, Ocado consulted with a significant number of its shareholders to gauge their feedback as to the terms and conditions of the Placing and Convertible Bond Offering. Feedback from this consultation was highly supportive and as a result the Board chose to proceed with the Capital Raise. The Capital Raise structure, which is consistent with the latest recommendations of the Pre-emption Group, was chosen as it minimises costs, time to completion and use of management time at an important time for the Company to pursue new growth opportunities. Ocado is pleased by the strong support it has received from new and existing shareholders, including a number of retail shareholders via the Retail Offer, and bondholders.”
I cannot go to war on this case, as
- the offer was priced at a 5.7% discount, but today the share price has dropped to 1948p, which is below the 1960p price of the placing; and
- the dilution was only 4.7%.
Nevertheless, one has to question why a rights issue was not done. The book build will have given institutional shareholders the chance to maintain their stake without dilution. The Primary Bid offer was limited to €8m (about £7.1m), so retail shareholders were always going to be diluted.
Mark Bentley, my fellow ShareSoc director has a different view to me: “My view, FWIW, is that this placing (< 5% of issued shares) is too small to justify the costs associated with a rights issue (especially underwriting costs). That size of issue without pre-emption rights would fall within the pre-emption group’s guidelines, irrespective of Covid-19. No one should be too upset. I wouldn’t be unhappy if I were an Ocado shareholder.”
The point Mark makes is a fair one.
However Looking at this more there are other points to make. This is a company with a turnover of only £1.7 billion , EBITDA of £43m and “adjusted” profit of minus £94m (ie a loss). The loss has increased from £33m the year before.
With a market cap of £14bn, surely it could quite easily raise £1bn of debt? So why did the advisers insist on £657m of equity and £350m of debt?
I have a sneaking suspicion that some people think this never will be hugely profitable business. The Ocado average basket is £106 and if I remember the Supermarket REIT presentation correctly the average delivery costs £15 to deliver (NB charges are different to costs!).
I don’t own Ocado but I do own quite a bit of Supermarket REIT. It is the only property company I own but it is a special case and is up 11% in the past year plus >5% dividend. Please note I am not qualified to give financial advice.
Cliff Weight, Director, ShareSoc
Remarkably, two of my own companies have had placings with PrimaryBid elements this week.
The first was SEGRO, on Tuesday; it was announced around 4.45pm and closed the same day (I have no idea when, because I got my offer in within 11 minutes). It increased the share capital by 7.5%, at a 4.7% discount to the previous day’s closing price.
The second was Air Partner, announced at 7.01am this morning, and closed before I managed to respond at around 9.10am. It increased share capital by a very chunky 18.75%, so I have been significantly diluted, although the discount to the previous day’s closing price was very small.
In neither case were these emergency fundraisings: both companies are coping well in the current crisis, and are financially robust. They were to take advantage of investment and expansion opportunities.
So how much opportunity did existing personal shareholders in these companies really have to participate?
Precious little.
We received just 1% of the total SEGRO shares placed, because of regulatory limits on the size of the non-institutional offer – and no figure has been provided for the Air Partner placing.
In both cases, we had to spot our email alerts, view the offer terms and documents and submit our offers (with cash up front) within a few hours at most, and under great pressure because we had no way of knowing when we would run out of time.
This is a classic scenario for bad, forced decision-making of the kind so popular with fraudsters and high-pressure salespeople; that alone will be enough to prevent many cautious shareholders from participating.
In the case of Air Partner, two directors filled their boots; they would have known this was coming. The rest of us did not.
It isn’t quite as outrageous a conflict of interest as director participation in institutional placings – which should have been banned years ago.
But even in this case, those directors were able to take advantage of an opportunity from which most of their personal shareholders, whose interests they are supposed to represent and protect, were almost entirely excluded.
Primary Bid’s emergency has allowed a few well-organised and highly-alert personal shareholders to participate in placings.
I suppose that’s progress of a sort.
But it’s extremely bad news for placings, because it gives directors an excuse to say “pre-emption rights don’t matter any more, because all our shareholders have an opportunity to participate”.
Maybe, but hardly on equal terms, as the SEGRO placings demonstrated, and of course existing shareholders are competing with anyone else who wants to grab an opportunity to pick up shares in our company at a discount. How soon with PrimaryBid placings be overwhelmed by professional arbitrageurs, I wonder.
If anything, these placings should make us more aware of the grotesquely inappropriate and unfair way in which most company fundraisings are conducted under current laws and regulations.
There is an urgent need for substantial reform.
You make some good points however you have missed some key points. We live in exceptional times, timing is everything and this applies to raising capital. Capital raisings of any type need to be done quickly and efficiently and this applies even more so in volatile markets as shares on the main market are not suspended. Volatile markets and big overnight moves can play havoc and underwriting costs with a traditional rights issue will be high. “Two directors filled their boots”. Well you can still fill your boots right now at 75p with regards to Air Partner. There will be some teething problems but the pandemic has forced us to reassess how we do a number of things but I think PrimaryBid is a major move forward and I support it.