Bellamy’s Australia Ltd: You can give your shares back to us

Fairfax media reported this morning that Bellamy’s Australia Ltd (ASX: BAL) may take the unusual step of formally inviting retail shareholders to withdraw from the recent capital raising, following the suspension of the Camperdown Powder CNCA (Chinese export) license.

As readers will know, Bellamy’s acquired Camperdown Powder with a view to securing an additional licensed source of supply for Chinese consumers. The company raised capital from investors to fund the Camperdown purchase, but the facility had its license suspended by CNCA just days after the acquisition settled.

Investors are understandably disappointed, and Fairfax media reported this morning that people who subscribed to the capital raising may be able to withdraw, with the ‘shortfall’ (returned) shares to be taken up by an underwriter.

If true – there has been no announcement from the company yet – this is a strong corporate governance move, as shareholders unquestionably did not get what they paid for when they subscribed for new shares in Bellamy’s.

However, given that Bellamy’s shares closed at $6.74 the day before the company was suspended from trade, it’s also important to ask whether someone else might stand to benefit financially from underwriting the shortfall shares.

If frustrated shareholders withdraw their application for the new shares, which were issued at $4.75, Bellamy’s will presumably seek to sell those shares to someone else. Therefore, that second party may be given the opportunity to buy shares at $4.75 in a company that that closed at $6.74 pre-suspension.

Fairfax posited that major shareholder and company Chairman John Ho may be one of the underwriters in this situation. This would be a net positive I think, as it would strengthen his alignment with the company and imply a determination to stick with the business, given that shares will likely fall heavily when Bellamy’s resumes trade.

What’s a shareholder to do?

In my view, your decision about whether to return your shares or not should hinge on whether you now feel you’re over-exposed to Bellamy’s, and if you think the company is undervalued at $4.75.

The Camperdown facility is just one part of the company’s business, and didn’t have a chance to contribute to production or earnings before it was closed down. If it didn’t re-open, the company wouldn’t miss anything as such, but would still be dependent on 3rd party suppliers. There would also be meaningful dilution of earnings per share of around 13%, given the 5 for 38 capital raising that took place (so each share would theoretically have lower individual value than previously).

I would be inclined to continue to hold my shares, unless the position was large enough to make me worry about my financial security, in which case I would consider selling some on market or returning shares to the company.

Are you planning on a blue-chip retirement?

If term-deposit rates stay low your lifestyle expectancy could stay low with them.

But you must act now. This above report on dividend shares is available for a limited time only, and your copy is 100% FREE. So don't miss out!

At The Motley Fool we know share markets can be volatile with President Trump and the great unknown of China front and centre. So we've handpicked 5 of our favorite term-deposit-crushing dividend shares to make your savings work for you.

Simply click here to receive your free copy of "Our top 5 ASX higher income shares for financial year 2018" right now.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.