Hornby, BHP Billiton, Pan African, and Share Radio

A few items of miscellaneous news worthy of comment:

  1. Investor Alexander Anton has launched a campaign to have Chairman Roger Canham removed from the board of Hornby (HRN) and get himself appointed as director. A requisition for a General Meeting of the company has been submitted accordingly. Hornby, the maker of train sets and toys, has had a poor financial performance in recent years with production difficulties, consistent losses, and a turnaround plan that is not obviously working. Mr Anton was involved in the revolution at Victoria a few years ago, with a very positive result, so he has experience of boardroom coups. He complains that Mr Canham’s position as Chairman of Hornby is inappropriate when he is also Chairman of Phoenix Asset Managment, who are the largest investor in Hornby. More will follow on this story.
  2. Another activist investor which ShareSoc has been involved with in the past is Elliott Advisors. They are attacking a much bigger fish than Hornby in that they have suggested that BHP Billiton (BHP) should be broken up. They wish to simplify the company, such as dropping the dual UK/Austalian company set-up, and suggest disposing of certain assets such as its US oil business and concentrating on its Australian mining activities. The company did spin off some of its metals businesses as South32 in 2015. Elliott has a 4% stake in BHP at present. This may be a long-running saga if the past tactics of Elliott are repeated, so we will no doubt hear more on that also.
  3. South African gold mining company Pan African Resources (PAF) announced a placing today (12/4/2017) to raise cash for the development of a new “tailings” project. The placing was at 14p when the previous day’s close was at 16p, i.e. a 12% discount. The share price trend also suggests that news about a possible placing had leaked out some days before, as happens very often. This is a placing, not a rights issue, with no accompanying “open offer” so minority shareholders are diluted and prejudiced in favour of institutions. The brokers involved were Numis, Hannam and Peel Hunt. ShareSoc has made lots of negative comments in the past about such placings in AIM company shares which we think should be reformed. It is particularly annoying when one personally holds the shares as I do in this case. I shall be complaining to the company Chairman.
  4. Financial news radio station Share Radio is apparently to close. Gavin Oldham, who set it up in 2014 and personally funded it, has apparently decided it is not financially viable according to a press report. It is disappointing to learn that a service that some people found useful is to disappear although I cannot say I used it much myself. Audio is a slow way of communicating information in comparison with the printed form which I suggest is one of the difficulties of the concept. Plus actually establishing a new business always requires enormous investment in building a customer base (an audience in this case). Well at least it’s not listed on AIM where unproven business models still abound.

Roger Lawson

Share issues – And An Interesting Rule

Spring is in the air, and companies are clearly in a mood to raise cash. A lot of these have been share placings but the reasons given have been varied. Placings rather than rights issues are always prejudicial to private shareholders as they are generally unable to participate, unless an “open offer” is included.

The share placing at IDOX (IDOX) was covered in the January issue of the ShareSoc Informer Newsletter and there is now a report on the AGM of that company on the Members Network where shareholders raised the issue again.

Cello Group (CLL) undertook a placing to fund the acquisition of Defined Healthcare – they raised £15 million to do so, but the placing share price was at a small premium to the previous market price. although the price moved up significantly after the placing was announced.

Learning Technology Group (LTG) did a placing to finance the acquisition of NetDimensions.

TrakM8 (TRAK) raised £1.66 million through a placing at 65p so as to reduce the company’s bank debt and strengthen its balance sheet. This was at a significant discount of 17% to the previous market price. The directors of the company took up a large number of the shares on offer.

One company that is doing a full rights issue is property business Segro (SGRO) although they had done a placing recently. The new transaction is to raise £573 million to finance the acquisition of the balance of an interest in Airport Property Partnership they did not already hold. However, the rights issue is being done at a discount of 28.9% to the previous closing price. Although investors can sell the “rights”, if they don’t and otherwise do not take them up then they will be diluted. Investors in Royal Bank of Scotland will not have happy memories of their heavily discounted rights issue in 2008.

One interesting recent announcement was from South African gold mining company Pan African Resources (PAF). They have apparently been “book building” to finance the development of a new gold mine at Elikhulu. But the Johannesburg Stock Exchange (JSE), where PAF is dual listed, has a rule that a company cannot issue shares at a price that is in excess of a 10% discount to the 30 day volume weighted average price. But as the current share price is lower, they have decided not to undertake an equity issue at this time and will finance development in other ways for the time being.

Now would that not be a good rule to adopt in the UK? It might make shareholders a lot happier because there are grumblings about all the above.

Roger Lawson

Cornhill Capital Fined Over AIM Placing

Cornhill Capital have been fined £210,000 by the London Stock Exchange (LSE) over a placing of shares in New World Oil & Gas on AIM. Cornhill was acting as a broker to the company which planned to place some 2 billion shares. That was twice the number already in issue. Cornhill sold shares to its private clients in advance of the placing with the sales to be fulfilled from the placed shares. But the placing required a vote of shareholders and they voted against it. As a result Cornhill was unable to settle the sales with the result that there was extreme volatility in the share price and the listing was suspended by AIM. The company has subsequently delisted.

The LSE said that Cornhill did not have adequate internal procedures to manage the forward selling nor did it have contingency plans for settling the sales in the event the placing was not approved.

Comment: This is yet another example of the problems created by share placings (we reported on the case of IDOX recently also) and the abusive practices that surround them. This was in essence a simple case of uncovered short selling of shares to clients by Cornhill, i.e.” naked” short selling as it is known. This practice is generally illegal (see http://www.lseg.com/markets-products-and-services/post-trade-services/unavista/regulation/short-selling-regulation ) although there are some exemptions.

It is also symptomatic of the “wild west” attitude to share trading in the AIM market. It is good that the LSE has imposed a fine in this case and publicly censured Cornhill – one of the few examples of this happening. But surely a lot more needs to be done to stop this kind of activity by brokers and other advisors in the AIM market.

Roger Lawson

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

CentralNic Placing Annoys Private Investors

This morning (8/12/2015), CentralNic Group announced the acquisition of Australian company Instra Group. Total cost is AU$33 million payable in cash and shares which will be supported by a mixture of debt and the issuance of new shares in a placing. Overall the new shares to be issued to the sellers and to institutional investors will represent 31% of the new overall equity so there is substantial dilution of existing investors taking place.

But what is likely to annoy private investors is that the new shares are being issued in the placing at 40p  which is a discount of about 30% to the recent market trading price. Only institutional investors will be able to participate as is quite common with such placings – there is no “open offer” in this case.

Both CentralNic and the company they are acquiring (which is profitable) sell internet domain names. There is no doubt business logic in this combination and the price being paid does not seem unreasonable. Placings which exclude private investors are annoying even if they are necessary to conclude a deal quickly. But those done at a hefty discount are particularly objectionable.

Shareholders who wish to complain could go along to the General Meeting required to approve this deal. But as it is scheduled for the 29th December, not many investors are likely to turn up.

The writer is a holder of shares in CentralNic.

Roger Lawson