Forge Group (ASX: FGE) was catapulted into the spotlight late last year for all the wrong reasons. Catastrophic undetected construction errors on its Diamantina and West Angeles power stations caused over $127 million in profit write-downs and placed the company in, as it put it, 'a challenging liquidity position in early December 2013'.
Australia and New Zealand Bank (ASX: ANZ) agreed to a bailout package that will fund Forge through to the completion of its current projects (including West Angeles and Diamantina) while still allowing for working capital to begin new projects. The proposal seems like about as good a deal as Forge was likely to get at very short notice, given that the ASX denied Forge its request to conduct an emergency capital raising.
In November, I wrote that the avoidance of an emergency capital raising was a good thing, as it prevented Forge Group investors seeing a ridiculous reduction in their equity given the low price of Forge shares at the time. However this is exactly what has happened, and the reduction in equity is worse than I had suspected.
ANZ has been issued 11,213,473 warrants with no cost price, and an exercise price of $0.01 up until 18 December 2016. You read that correctly: one cent, for a company valued at around 90 cents on the ASX recently. This will allow ANZ to convert its warrants into 13.02% of the company for the grand price of $112,134.73. Bargain! ANZ is also entitled to a cash payment in lieu of the shares (if it so decides), equivalent to the value of the 20-day Volume-Weighted-Average-Price minus the value of the warrants. In the event Forge conducts a further capital raising, ANZ is also entitled to receive a similar cash payment if it decides not to subscribe for new shares.
Of course, ANZ is providing a huge funds injection at short notice, which entitles it to receive a fair value for services rendered and risks taken, but anger on the shareholders' part is understandable. Forge is holding an Extraordinary General Meeting on the fourth of March, according to my sparse info booklet, where shareholders will have the opportunity to vote to approve the warrant issue. Only 50% of shareholder votes are required to pass the resolution, which should see large shareholders carry the vote without much struggle. However the percentage of votes against or abstaining will be a good way for executives to judge shareholder dissatisfaction.
Foolish takeaway
I recommend that Forge shareholders vote in favour of this resolution. I will be voting in favour and the lifeline extended by ANZ seems to be the best opportunity for a bad situation. What ANZ decides to do with its warrants in the future – convert into shares or cash – could also be a signal to shareholders of the bank's faith in Forge's prospects.
