Let me tell you a little tale of City life. A tale that will very probably set your teeth on edge.
There is a small company, let’s call it Tech UK. And it wishes to raise some money to finance its expansion plans. Its first phone call is to a fund manager at one of its largest shareholders. The company’s shares are trading at 25p at the time. “I am willing to commit some more money to the business by subscribing for new shares”, says the fund manager. “But only if you issue them to me at 15p.”
If the fund manager is not prepared to buy new shares for more than 15p, you may ask why has he not been trying to sell them at 25p. But the moral of this story is that the fund manager will always look after his own interests.
If he is issued shares at 15p, that is fine for him and his clients. But it is at the expense of dilution to the interests of all other shareholders. And that is a problem that is becoming disturbingly commonplace. Here’s why…
The problem with share placings
Given that the fund manager’s job is to make money for his customers and not for anybody else, you could argue that he is right not to care about this.
But the point is this. Unless it can whip up some real enthusiasm and have buyers competing for shares, a company that wants to raise money through a placing is at the mercy of a few big shareholders in the City. Private investors quite understandably get mad when they see discounted shares offered to others, but not to them – a subject I have covered in previous Penny Sleuths.
A current example concerns Summit Corporation (SUMM). It is proposing to almost double its share capital through an issue to just a few at 3p. This is less than half the prevailing share price. I am delighted to see that private shareholders are mustering to vote against the proposals – see www.troublesumm.co.uk for more on this.
Why this activity is kept secret in the City
Once a company has approached a shareholder to sound him out about a possible share placing, the latter has then been made an ‘insider’. He can no longer deal in the shares. Suppose he has been told that the company would like to place new shares at 5p, he cannot then sell his shares in the market at 6p.
Knowledge that a share placing is in the offing will depress a share price, which is why it is kept as a secret known to only a few in the City.
Another argument that I frequently hear goes like this. If a company announces an offer to all shareholders, it must make public the amount that it intends to raise – say £5m.
If the take-up for the offer is poor and it fails to receive this amount, it will be perceived as being short of necessary funds and lacking that most treasured of virtues ‘market confidence’. The obvious solution to this is to have the issue underwritten. But this practice, which used to be considered as easy money, appears to be a dead art.
In the end though, the defence for discounted share placings to the select few is undermined by evidence that where there is a will to include all shareholders, there is a way. Here are a couple of examples.
Could these AIM-listed companies set the trend?
On 27 March, I mentioned Digital Learning Marketplace (DLM) which managed to raise £102,325.25 by selling new shares to a wide spectrum of investors at a cost put at just £5,000. According to DLM’s CEO, working closely with private investors is something that should happen more regularly. And I couldn’t agree more.
Wildhorse Energy (WHE) has raised some money through a firm placing while making additional shares available on the same terms to all investors, as has ReNeuron (RENE). In the latter case, Reneuron is planning to raise £9.4m, £5.4m through a firm placing and the remaining £4m through an open offer that has not been underwritten.
As Reneuron says “if no applications to subscribe under the open offer are received, the total amount that the Company would raise would be approximately £5.4m”. In other words, it is prepared to run the risk of ‘damaging market confidence’ in order to give all shareholders a chance.
Small companies regularly tell me that they are keen to encourage private shareholders on to their register. Great! But they have a moral duty to treat them fairly thereafter.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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