The hidden catch to Berkshire Hathaway's Insurance Australia Group Ltd investment

Shareholders in Insurance Australia Group Ltd (ASX:IAG) can expect to be disadvantaged in future capital raisings.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Readers may have seen articles in various media outlets this morning about the special treatment of Warren Buffett and Berkshire Hathaway, with regards to its purchase in Insurance Australia Group Ltd (ASX: IAG).

What's it all about?

In short, the ASX has permitted "'National Indemnity Company' ("NICO", a subsidiary of Berkshire) to maintain, by right way of a right to participate in any issue of shares or to subscribe for shares, its percentage interest in the issued share capital of the Company (IAG) in respect of a diluting event."

This means NICO is entitled to a percentage of any upcoming capital raisings or rights issues equivalent to its existing stake in the company, subject to a few limits.

But surely NICO would be entitled to participate in a capital raising anyway?

Yes, but depending on the circumstances of the capital raising, this 'anti-dilution' protection allows NICO to participate more fully than other investors.

If IAG were to issue say, one new share for every thirty held, this would normally dilute NICO who currently holds one share in every twenty (5%) on issue. However, as it has this anti-dilution protection, NICO will be entitled to buy one share for every twenty it holds.

If NICO happened to hold 10%, it would be entitled to 10% of the new shares to be issued.

There are several conditions; NICO cannot hold more than 14.9% of IAG under this agreement, it must pay an equal price or value to other shareholders who are participating, and the agreement will cease if NICO and IAG cease to be strategic partners.

Even so, doesn't this confer an unfair benefit to NICO?

Yep. One investor is being offered privileges that are not available to other investors.

Is there a compelling reason for this?

IAG requested the anti-dilution right because Berkshire/NICO are significant strategic partners of IAG, not just because they are a major shareholder. However, it is hard to justify this action.

Should a capital raising dilute NICO, would it be a less effective partner of IAG because it only owns – for example – 4% of the company's shares, instead of 5% previously?  Given that the profit and liability-sharing terms of the strategic agreement have already been established, it's hard to argue that it would.

This is yet another case of one group of shareholders being given special privileges, made worse by the fact that it is sanctioned by the market operator, ASX, who is theoretically aiming to operate a fair and transparent exchange. Given management's role in requesting that the anti-dilution right be awarded to NICO, it also reflects a black mark on IAG's treatment of its shareholders.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »