By Simon Morris
NEED TO KNOW
• Accelerated offer structures may give companies an ability to offer entitlement offers to members at a lower funding cost than traditional rights issues.
• This article examines the development of these offers in the last decade and the latest “PAITREOS” structure which combines an accelerated timetable with a traditional rights trading period.
Companies seeking to raise equity have two broad choices. Placements of shares to institutional investors have the advantage of minimum disruption and timeliness. A placement can literally occur overnight translating into lower transaction fees.
However a placement is constrained by the ASX Listing Rules to 15% of the company’s capital. Moreover as the placement is likely to be priced at a discount the effect of the offer may be to dilute the value of the investment of existing shareholders especially retail holders (although conducting a share purchase plan which allows acquisitions of up to $15,000 contemporaneous with a placement may partly address this issue).
The preferred option for many companies therefore is an entitlement offer to its own shareholders. Rights offers were however relatively expensive reflecting the long period and hence underwriting exposure between the announcement and closing of the offer. The key design decision was simple – should the offer be renounceable or not? A renounceable offer gave shareholders the ability to trade their right to take up shares; “rights” trading enabled shareholders to liquidate what in theory was the intrinsic value of the offer and therefore compensate shareholders who did not take up rights.
Evolution of Accelerated Structure
A characteristic of Australian equity capital markets in the last decade has been the evolution of the accelerated entitlement offer. The commercial purpose of the accelerated structure has been to combine the benefits of a placement of speed and economy with the equity of allowing all shareholders to participate in a rights issue.
Accelerated structures have undergone continuous refinement. An early iteration were so called “Jumbo” offers (first used in the Adstream Marine offering in 2001). In its earliest form this offering structure raising consisted of a large placement followed immediately be a non-renounceable entitlement offer to all holders. This was refined by the placement component being substituted by an institutional offer to the company’s own institutional holders with a “book build” to settle the price of any additional shares acquired under the bookbuild. Jumbo offerings shared the weakness of any other non-renounceable offer – if a shareholder did not have funding at the time of the offer they would be diluted.
Refinements sought to improve the position of the retail holder. One method of achieving this was the so-called Renounceable Accelerated Pro rata Issue with Dual bookbuilds (RAPIDS) structure (attributed to Macquarie Bank), where the company conducts not one but two bookbuilds. The first bookbuild takes place immediately after the entitlement offer is announced; institutional holders can elect to take up their holdings and also elect to participate by taking up the entitlements of other institutional holders in a competitive auction process. The amount paid over the nominated entitlement price (if any) is then paid to the institutional holders who did not take up those shares. The institutional holding is followed up by a retail offer to participants who are not qualified to
participate in the institutional offering. At the end of this process institutions are invited to participate in a second “bookbuild” to acquire the shares not taken up by the retail holders; any amount bid for shares above the entitlement issue price will be distributed to the non-participating retail shareholders.
In theory this amount should be similar to the market value of rights in a conventional renounceable offer thus appropriately compensating shareholders who do not participate in the offer. The twin bookbuild structure has been implemented regularly in the last five years but there are concerns that it may not necessarily assist retail shareholders. Empirically the price derived in the retail bookbuild was lower than that derived from the institutional bookbuild meaning that renouncing retail shareholders obtain minimal return. It has been suggested that the knowledge that institutions could buy back in under a bookbuild following the close of the retail offer meant that some holders could be motivated to sell down sufficient holdings to reduce the price of the shares prior to the close of the retail offer.
A variation was to have only one bookbuild applicable to both the institutional and retail components of the offer. Institutional holders would still receive their shares ahead of the retail but the renunciations of institutional holders and retail shareholders were dealt with in one bookbuild. The structure proved clumsy in practice however and the delay to the bookbuild of four weeks meant to some extent the benefits of acceleration were lost. The alleged benefits of sale down of entitlements designed to trigger a fall in the share price were also not addressed by this proposal.
The latest refinement of the accelerated structure is to allow explicit renounceable trading by retail shareholders within an accelerated timetable. This is the PAITREO (Pro rata Accelerated Institutional, Tradeable retail, Entitlement Offer) structure which is generally attributed to Bank of America/Merrill Lynch who introduced it in connection with an entitlement offer by Origin Energy in 2011.
The renounceable trading period deflects many of the concerns in respect of the alleged unfairness of the accelerated offer to retail holders. Rather than waiting for the final retail bookbuild, retail holders can trade their entitlements on market. Rights trading also ensures that the number of shares left to the final retail bookbuild will be contained (as parties acquiring rights will do so to take
up the entitlements) thus leading to a more attractive outcome in the bookbuild.
Early experience does suggest these objectives were realised. In contrast to most bookbuild raisings the retail bookbuild in the Origin offer resulted in a higher bookbuild price than the institutional bookbuild. The retail take up under the offer was around 79%, compared to an average for the last 18 accelerated issues of approximately 47%.
It will be interesting to see if this new structure becomes the preferred alternative for accelerated offer (it has since been used in a similar form in offers by Goodman Fielder, Super Retail and Bluescope Steel). The structure seems particularly well suited for companies with a very large retail register; arguably without that condition the increased complexity would not seem justified.
Some observers have suggested the need to facilitate renounceable rights trading will mean that the company may tend to price the offer lower than a comparable accelerated offer, but this is likely to be determined by financial advisers on a case by case basis. Accelerated offers are not dominant by number in the Australian market place. In the first nine months of 2011 there were approximately 180 non-renounceable entitlement offers and 60 renounceable offers by ASX listed companies. Of those 60 renounceable only 7 were in a structure that could be considered to be an accelerated offering. However accelerated offers are far more common among ASX top 200 companies with higher numbers of retail holders. However the innovative accelerated structure can be invaluable to Boards seeking to balance the competing objectives of raising share capital at minimal cost, while being fair to its own retail shareholders.