When I attended the Vocus Communications Limited (ASX: VOC) 2013 Annual General Meeting last year, I initiated a discussion about ways the company could raise capital, without disrespecting retail shareholders. My impression was that the general consensus amongst shareholders who spoke was that a tradeable renounceable rights issue would be the fairest way. Indeed, I starkly recall one of the directors moving the discussion on by saying something along the lines of "we've already heard about the best way to raise capital." I thought they agreed.
I'm therefore surprised to see that the company is issuing shares via an institutional placement, without making the same offer to retail shareholders. This is especially so, because I had never attended an AGM where the directors up for re-election actually introduced themselves and made their case for re-election, as the Vocus directors did. The purpose of the capital raising is "to improve balance sheet flexibility and ensure Vocus is well-positioned to take advantage of future growth opportunities." At least the offering is subject to a book build, and the impact of the offering to existing holders will depend on the final price paid for shares. For now, I'm not as upset as I will be if shares end up going for $4.10 (the underwritten price). It may just be that good timing makes this capital raising not too bad, although it's certainly not ideal.
Take Stock subscribers may recall that M2 Group (ASX: MTU) used a tradeable renounceable rights issue to raise capital in 2012. At the time, I found myself in the unusual situation of agreeing with The Australian, which reported: "It's refreshing to see M2 Telecommunications and its adviser Goldman Sachs resort to the traditional rights issue to help fund its $192 million acquisition of Primus Telecom." On the subject of M2, I have to say I think the company is becoming more attractive, as it slowly pays off its debt.
When Vocus raised capital in 2012, the company had a share purchase plan to accompany the institutional placement. However, the company has today announced a trading halt so it may raise capital from institutions alone. The offer is underwritten at a floor price of $4.10, more than a 10% discount to the last traded price, and over 7% less than the five-day VWAP.
What I find most frustrating is that the offer comes just days after the company was admitted to the S&P 300. This puts the company firmly on the radar of a number of institutional investors. Indeed, it's fair to say that the latest increase in market capitalisation has brought the company to the attention of a wider audience. For example, the Eureka Report recently noted that Vocus "is at a record high after recording its fifth consecutive day of gains, but not many would have heard about the stock."
To my mind, increasing awareness of Vocus amongst retail investors and greater institutional interest in the stock could easily have pushed the share price beyond what I would consider a reasonable price, and I had formed the intention to sell some of my oversized holding into expected inefficient pricing. No such luck.
At least CEO James Spenceley has good timing, although I rue the fact that the company is making it so easy for institutions to get on board; I want a lot more than $4.10 for my shares. There can be no doubt that demand for Vocus shares is booming. The share price no longer presents the same value it did in 2012 and 2013, but the company is continually increasing its competitive advantage.
Still, I would be happy to let institutions bid for the shares on-market, just as Perpetual Limited (ASX: PPT) has. I guess retail shareholders can thank Perpetual for perhaps pushing the price up prior to the capital raising. It could have been worse.
Foolish takeaway
If the final price paid by institutions for Vocus shares is $4.50, I'll have to admit that the end result was almost satisfactory, because that's a little more than I would pay for shares right now. However, if the price is around $4.10, then all retail shareholders must wonder why they have been diluted for the benefit of institutions.
New shares should be sold at close to the prevailing market price, not at a large discount to selected institutions. As I wrote recently, the window of opportunity to make an attractive investment in Vocus still seems to be closing, as institutional attention is likely to eliminate any margin of safety. Put simply, the dilution is unwelcome, the method sub-optimal, and the opportunity for major institutions to get on board without creating market demand is a lost opportunity for current shareholders.
