Contact Energy’s recent rights issue is a model to be encouraged as shareholders who allowed their rights to lapse still received $0.80 compensation for each right when typically they would receive nothing.
Contact’s $351.2m equity raising by was done by way of a 1 for 9 pro rata renounceable entitlement offer. This meant that shareholders on the register as of market close on the 9 May received the right to purchase one new share in Contact for every 9 shares held at a price $5.05. This was a 13.8% discount to the closing price on the day before the announcement of this equity raising.
Investors had three choices:
- Accept the offer to purchase their entitlement of new shares at $5.05.
- Sell their entitlement on the NSZX. The purchaser would then presumably accept the offer to purchase shares.
- Do nothing and let their entitlement lapse.
Under most New Zealand entitlement offers, if investors failed to execute option one or two they would receive no compensation for their rights. Under this particular entitlement offer, Contact offered the rights that were not exercised by investors to institutional investors through a short-fall book build. If the price of the short-fall book build settled above $5.05, then those investors who did not exercise their rights would receive the excess of the book build sales price over $5.05
In this entitlement offer 94.5% of the rights were exercised, leaving 5.5% or 3.8m shares to be sold through the short-fall book build. The book build sales price was at $5.85 meaning investors who failed to accept or sell their rights received $0.80.
The average volume weighted price of the rights traded on the NZSX was $0.90 with a high of $0.99 and low of $0.83. While investors would have most likely been better off selling their rights on the NZSX, those that did not accept or sell their rights still received $0.80 for each right. This is far better than receiving nothing if this feature was not applicable. At the time of writing, Contact was trading at $5.86, meaning the value of exercising the rights was effectively $0.81.
The sale of lapsed rights with original investors receiving the proceeds is a regular feature of offshore financial markets. We would encourage more of our companies to adopt this approach.
William Curtayne