Placings and Open Offers and How to Do Them – St Ives and Tritax

One of the things that annoys private investors is when a company does a placing of shares. This can be for a number of reasons such as the company needing funds for an acquisition, or simply because the company is fast running out of cash and wishes to stave off financial distress.

Because of the EU mandated Prospectus Directive, a full Rights Issue where all shareholders can participate in the share issuance and hence avoid dilution of their stake, does require an expensive process including the production of a full prospectus. This is of course a bit of a nonsense in that the same or other investors can buy shares in the market at the same time without reading a single thing about the company concerned, although those investors in RBS who are pursuing legal action on the basis of a misleading prospectus in 2008 might not think so. But the EU Commission is looking at this problem. The result at present is that most smaller companies go for a “placing” – in other words a sale of shares to a selected and small group of institutional and other investors (but it has become increasingly difficult for any private investor, however large their stake, to participate).

Now a couple of placings last week caught my attention. One was at St. Ives who are raising £13.8 million to help finance an acquisition. They are issuing 6.4 million shares (about 4.8% of the existing share capital, so a relatively small proportion) at 215p. The share price on the day of the announcement was 216.5p so the discount is very small (it’s really large discounts that annoy investors who cannot participate). If you wished to avoid the small dilution, you could easily buy some more shares in the market. So although there was no accompanying “open offer”, this was probably of no great concern to investors in St. Ives.

Tritax Big Box REIT went one better by announcing a placing linked to an open offer where some shares are reserved to be taken up by those shareholders not invited into the placing. In addition there was an “over-subscription” facility where you could ask for more shares than your entitlement, to be supplied from those made available to investors who did not wish to take them up. Note: one of the very few advantages of pooled nominee accounts is that because the entitlement relates to the pooled nominee, and many private investors don’t take up their entitlement, you can often obtain many more shares than expected. In addition some of the placing shares are to be marketed to retail investors via stockbrokers.

Tritax is a name you may not have come across. They are a Real Estate Investment Trust who specialise in large warehouses. The demand for these is growing to service the new breed of internet retailers and distributors. Segro (formerly Slough Estates) have also been moving their focus to this sector which has held up well in comparison with the slump of share prices in the commercial property sector more generally since the start of the year.

In addition the placing/open offer by Tritax is at 124p which is a discount of 5.8% to the share price before the announcement. But it is still at a premium to the net asset value (an important measure for property companies) and the new shares will not participate in the pending interim dividend. With a 1 new share for 11 existing shares, and the options available to investors, it seems unlikely any investors will be unhappy. So well done Tritax.

What really annoys private investors is a heavily discounted share placing where there is no open offer – Rightster (RSTR) was one recent example. They placed 200 million new shares at 5p when the previous share price was 9.5p. This company was in some financial difficulties and had undertaken a strategic review with new directors joining the board (and investing in the company). But is it fair for directors to participate in such placings which means that they obtain shares at a favourable price? One might argue that there may be few other investors willing to take up shares, but surely it would discourage such behaviour if they were unable to participate and hence were forced to suffer dilution like every other existing investor? This is one of the things that has been suggested as a way to reform the cavalier behaviour of some AIM company directors. What do you think? Or are there other solutions to this problem?

Roger Lawson

More Bad News for Banks and their Investors

If there are any private investors still invested in major UK listed banks, last week (w/e 30/1/2016) was yet another for disillusionment. In the Financial Times, Lex hit the nail on the head when he said “The one-offs keep on coming. If one did not know better, one might suspect them of being two-, three-, or more-offs”. He was referring to Royal Bank of Scotland (RBS), but other banks likewise posted bad news during the week. Let’s take them in turn:

RBS warned of yet another year of losses in a Trading Statement – its eighth in a row. There will be £4.2 billion of accelerated pension charge recognition, an additional provision of £1.5 billion in respect of US mortgaged backed securities litigation claims, an additional provision of £500 million in relation to Payment Protection Insurance mis-selling and a £498 million impairment charge in its private banking business (Coutts). Did you think all the bad news was digested, and provisions made a couple of years ago to clean the bank up ready for sale of the Government’s stake? Apparently not. The ability for the Government to exit at a profit on its holdings looks as far away as ever, particularly as there is a legal suit from investors about the rights issue in 2008 still going through the Courts. The share price has been falling now for many weeks and the above news did not improve it.

How is that other bank faring in which the Government hoped to dispose of its stake (Lloyds)? George Osborne indicated that he was postponing the sale of the Governments stake due to “turbulent financial markets”. In other words, nobody, not even private investors who were to be offered some shares, wished to purchase more shares in anything at present. Indeed the Lloyds Banking Group share price has also been falling since the autumn of last year and at 65p is below the Government’s break-even price of 74p. It looks like Gordon Brown and Alastair Darlings scheme to bail out the banks by partial nationalisation in the great banking crisis, and turn a profit at the same time, is proving misconceived after all.

HSBC did not avoid bad news either. They were hit by a large Digital Denial of Service (DDOS) cyber attack which meant many of their customers were unable to access their on-line banking service for a number of hours. The police have been called in, but the real question is why HSBC did not have systems and software in place to thwart such attacks (such products are available), or why they did not work?

Did Barclays escape the wave of negative publicity? Not quite because it was revealed that they are being sued for £1bn by Amanda Staveley. She helped to raise loans of £5.8 billion in the Middle East for the company in 2008 to avoid the similar threat of partial nationalisation to Barclays. When the details of the deal were later revealed Barclays was fined £50m for not disclosing it properly so presumably this suit might threaten to reveal more.

But to cheer up those embattled bank investors (at least those in Lloyds and the former HBOS), the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) announced they were going to take another look at the activities of the former management and directors or HBOS prior to its collapse into the arms of Lloyds. This comes after the publication of a report from the inquiry into what happened which severely criticised the lack of action against the people involved, and subsequent pressure from MPs in Parliament to reopen the matter. Will anything significant come of it at this late date? It looks extremely unlikely.

It is an investment truism that folks don’t invest in businesses and management they do not trust. UK listed banks still have a long way to go to regain the faith of investors. Only when they stop revealing more historic misdemeanours and losses, or exceptional items of all kinds, will they regain the loyalty of investors. And of course after fixing their creaking IT systems.

Roger Lawson

UK Share Ownership Structure – Not Fit for Purpose

The Editor of Investors Chronicle commented on the recently published BIS Paper on the structure of UK share ownership in this week’s edition (see the last article on our blog for more background). He had this to say: “The Department [BIS] finally seems to be coming around to the view that it is, quite simply, not fit for purpose – a view we have held for some time and which I am regularly encouraged by readers to push further. So well done to ShareSoc and UKSA, which have both been working tirelessly to expose the iniquities of the nominee structure – even if markets aren’t getting any easier, they might at least become fairer”. Yes ShareSoc has put in a lot of effort on our campaign in this area and we have a further meeting with the BIS Department lined up.

In the same edition the Investors Chronicle also published a letter from reader Bob Simpson who was affected when his stockbroker went into administration (the problems caused by brokers going bust and how to avoid them was covered at length in the last ShareSoc Newsletter). Mr Simpson had this to say: “The fact that an administrator can demand payment from the asset value of the shares, and has the power to freeze the shares and trade in them can’t be right”. It took him a year and half of hassle to get the final amount of money due to him through and he did not get everything paid back.

As Mr Simpson also pointed out, most people are unaware of the risks they are taking by using nominee accounts. ShareSoc has not asked for nominee accounts to be outlawed altogether but we think they should have very strong “health warnings” attached to them and people should specifically have to opt in to use one. Plus ISA and SIPP accounts should not require the use of a nominee. Those would be partial solutions to this problem, but of course we also need a low cost, electronic replacement for paper share certificates where a holder could buy or sell through any broker and not be reliant on an administrator to do anything at all.

Roger Lawson

BIS Release Paper Showing the Mind-Boggling Complexity of the Intermediated Shareholding Model

The Government BIS Department have released a Research Paper entitled “Exploring the Intermediated Shareholding Model”. It shows in 160 odd pages the existing share registration models in the UK and the underlying systems that support shareholder rights (including voting). In essence it demonstrates perfectly the need for reform.

It shows that private investors often do not know what rights they have in nominee accounts or indeed that there are alternative ways of holding shares. Even if they are aware they should have rights, they often do not know how to exercise them, and few brokers actively encourage them to do so.

Institutional holders are also baffled by the complexity of the intermediary chain and cannot easily determine whether their votes have been cast. As it says in the Paper: “In both communities, investors had become systemically distanced from the companies they invested in over time”.

ShareSoc welcomes the report as a contribution to the debate for the need for reform. It well explains the iniquities of the prevalent nominee system in comparison with the historic position of individual investors with share certificates or those holding Personal Crest Accounts.

The Paper does not of course propose any remedies for all the failings it makes plain – that may come out of the BIS in due course. But it makes it clear why we need a better alternative to nominee accounts that is readily available and a good electronic form of holding shares to replace paper share certificates, for which ShareSoc has been campaigning for some time (see http://www.sharesoc.org/shareholder-rights.html ). Plus of course why ISAs and SIPPs should not require the use of nominee accounts which are currently mandated by almost all brokers although legally that was not the original intention.

The BIS Paper can be found here: https://www.gov.uk/government/publications/shareholding-the-role-of-intermediaries

More analysis and comment on the Paper by ShareSoc can be found here: http://www.sharesoc.org/BIS-Paper-Shareholding-Model.pdf

Broken Brokers and Nominee Accounts

There is a great letter from a reader in this weeks Investors Chronicle on the subject of nominee accounts. Under the title “Broken Brokers”, Jonathan Crozier says he used to work for Pritchard Stockbrokers who are one the brokers that went bust covered in previous articles. He complains about the low level of compensation under the Financial Services Compensation Scheme (currently £50,000) which he says is a ludicrously low figure for Mr Average.

But this is the paragraph that made the most impact: “Ask any of Pritchard’s ex-client little old ladies what they think of nominee accounts and the FSCS. Find me one who does not now wish that they had never heard of nominee accounts. Indeed, if they had insisted on keeping their shareholdings in their own-name (certificated) form, they would have lost none of their capital in Pritchard’s administration – and would have saved themselves so much time, energy, stress and distress. Nearly four years after the event, I believe there are still ex-clients who have not recovered their money”.

This is why we need a better alternative to nominee accounts that is readily available and a good electronic form of holding shares to replace paper share certificates, as ShareSoc has been campaigning for (see http://www.sharesoc.org/shareholder-rights.html). Plus of course why ISAs and SIPPs should not require the use of nominee accounts.

Roger Lawson

Home Retail Group Trading and Disposal

As a follow up to my blog post on the possible Sainsbury/Home Retail deal yesterday, here are some comments on the Home Retail Group trading statement issued this morning.

Total sales at Argos increased 0.9%, but like-for-like sales were down 2.2% in the period as a result of reduced store footfall and growth in digital transactions. Homebase total sales were down 4% but like-for-like grew by 5% – this mix arises from an “aggressive store closure program”.

But the killer in their statement is that “As a result of the recent trading period, we expect that Group benchmark profit before tax for the financial year ending February will be around the bottom of the current range of market expectations……”

There are however a lot of positive comments about new initiatives, particularly in the digital area and distribution capabilities. Note also that the previous day they announced they were near to disposing of Homebase for £340m in cash. That might simplify the possible bid from Sainsbury as they had no obvious plans for that operation and hence the assumption was that they would be disposing of it anyway.

The trading statement in essence reinforces the previous view held by many on Home Retail Group – that Argos is a catalogue business in decline but trying to reinvent itself as a modern web based business with an efficient distribution capability. That transition is going quite well, but they still have 844 stores which actually grew by 4 during the period. Although a lot of them are on short leases, the question is whether they are of much use to Sainsbury. The concept of customers using terminals in-store to purchase products over the net also seems an odd one and an adaptation of a legacy model rather than a move directly into the digital age.
Roger Lawson

More on Sainsbury (SBRY) and Home Retail Group (HOME)

Sainsbury published their Third Quarter Trading Statement this morning (13/1/2016) and they have also published a document arguing the merits of their possible bid for Home Retail Group under the title of “Accelerating our strategy for growth”. Home Retail Group previously rejected an approach from Sainsbury on the basis that it undervalued the company. This note discusses the latest news as a follow up to my previous comments on this matter.

Now I have previously declared an interest in this subject as I recently purchased a few Sainsbury shares on the basis it looked the best value in a depressed supermarket sector, which might recover sooner or later. My holding of Sainsbury is currently less than 0.2% of my whole portfolio by value in case anyone thinks I am getting too emotional on this topic. It’s a “value” purchase for me, with a good dividend yield which looks sustainable.

The relative market caps of these companies were £4.9 Billion for Sainsbury and £800 Million for Home Retail before the initial announcement of the possible offer, and with a rumoured bid of £1 Billion it might be digested without too much difficulty via a mix of cash and shares, which is what is on the table apparently. However Home Retail’s share price jumped by 40% on the day of the announcement, putting it on a prospective p/e of over 14 and a much higher valuation. But the key question is why would Sainsbury want to acquire these businesses (Argos, Homebase, et al) which have shown no growth in the last few years? Cash flow has been negative since 2011, with £55m more working capital to finance a loan book, £23m in restructuring costs (a persistent feature of recent accounts) and £49m in market share repurchases last year. Home Retail did look cheap (forecast adjusted p/e was 10.1) but whether it makes a good strategic fit looks more questionable.

As I said before, there was a lot of negative media comment about this proposal, and even assuming substantial “restructuring” by Sainsbury of Home Retail it is not clear where the benefits lie. As someone who has worked in the retailing sector in the past, I thought the best comment was this: “Its list of deal benefits appears to have flowed from the pen of an investment banker who has not been in Argos for a while or ever”….Tony Shiret of Haitong Research. Even a 25% shareholder in Sainsbury does not seem happy with it according to the Guardian, although Sainsbury denied they had come to any conclusion on it. The Financial Times reported retail analysts Richard Hyman as saying “I think this would be a strategic error for Sainsbury’s”, and Louise Cooper as saying “It’s a deal done from a position of weakness – it’s one ailing high street business trying to buy another ailing high street business. It doesn’t make sense”.

But it’s not a one-sided argument as if often the case with such bids as otherwise it would not have got this far. Paul Scott who writes for Stockopedia defended it on the basis that Argos stores could be used as local collection hubs and that Home Retail had “enormous balance sheet strength” with “net cash and an enormous storecard debtor book” but he did declare he had been a Home Retail shareholder.

Let’s look at the latest news. Firstly the Sainsbury third quarter trading. A mixed bag in essence with total sales up by 0.8% (excluding fuel), but like-for-like sales down – an important measure for retailers. Comments on Christmas trading were positive – over 550,000 Christmas puddings sold – but a closing remark was negative: “Food deflation and pressures on pricing will ensure that the market remains challenging for the foreseeable future”. There was minimal movement in the share price as a result on the day.

What does the “Accelerating our strategy….” document say? It mentions the need for customers to want a huge variety of products (correct), support of online and mobile (correct – Argos have a good system apparently), and both in-store, home delivered and click & collect (perhaps – I always perceived the latter mode as an intermediate channel of minority interest and there are other alternatives to using high street retail stores to support it). It has been suggested that Sainsbury could sell Homebase and use Argos stores for distribution of general merchandise, or dispose of them – many are on shortish leases apparently, but does using them for distribution make sense?

The Sainsbury document notes the ability and desire to grow general merchandise and financial services where Argos has some strengths, and the desire to expand their “convenience” store estate which Argos shops might be suitable for, except that the size, location, internal shop layouts, etc, might not be a good match. For example convenience stores typically need car parks or at least easy on-street parking which I don’t think many Argos stores have.

Sainsbury says “Home Retail Group’s strong multi-channel capabilities and infrastructure would step change our ability to meet our customer’s needs for further flexibility and choice” and “both businesses share a similar culture”. What it does not say is that the customer profile of the two companies is probably substantially different.

How should one look at this proposal? Financially on the basis that Sainsbury are buying assets on the cheap by acquiring a business that has been undervalued by the market based on the perception that it was a dog in decline? Or on strategic benefits? Sainsbury is arguing very much for support on the latter basis so they should surely be judged on that. Otherwise we can leave Home Retail to the circling private equity vultures.

The Sainsbury document about the possible merger goes on for some length explaining the detail possible synergies which this writer will not repeat, and concludes with the comment that it is a “strategically compelling strategy”.

Now some commentators have suggested this is a response to the threat from Amazon (who have opened a skeleton food store called Amazon Pantry in the UK recently, not that it looks very impressive at present). A move into general merchandise is a typical “got a problem in your current home market – diversify” type of reaction, which rarely works. There might be higher margins on general merchandise, and Tesco have been successful in extending their range into that sector, but it also means more floor space is required. But having it in Argos stores some distance away, even if rebranded as Sainsbury, hardly seems to make sense even if it is being used to service web sales. You don’t need high street stores to service web sales, on a direct delivery or click & collect service.

So this writer remains unconvinced unless the strategy is really to acquire Home Retail, sell off the saleable parts, dismantle most of the rest, and retain a few key assets including the cash and loan book of course. That way it might make sense. But that is not what Sainsbury are trying to sell us, perhaps because it would generate opposition anyway from the Home Retail board.

In general acquisitions of complementary businesses which can be integrated with little management effort make sense. Those that require large scale restructurings of businesses with probably different cultures and customers, and which consume a lot of management, time do not. This proposal looks more like the latter than the former. That in essence is probably why so many independent commentators have not so far been convinced of the merits of this proposition. And this writer remains to be convinced also.

There is a course a price for everything, but the price Sainsbury might be paying to meet the expectations of the Home Retail shareholders and their board looks way too much. When looking at these kinds of propositions, there is one simple question to ask: what else could Sainsbury do with the amount they might pay for Home Retail to grow their business, improve their competitiveness, improve their return on capital, expand their distribution or otherwise improve their business? Send your answers on a postcard to the Chairman of Sainsbury I suggest (and send ShareSoc a copy if you want them printed).

Or for those yet undecided, the beauty of investing in retailers is that you can visit the stores and see what you think about the business, talk to the staff and generally do your own research. So do some shopping in Sainsbury, Argos and Homebase and then make your mind up.
Roger Lawson