Thursday, 14 February 2013

Huge dilution for SP Setia shareholders

SP Setia has announced a private placement (PP) of 321 million shares (15% of the outstanding shares) at a price RM 2.94 per share, a 7% discount to the market price.

According to this article in The Star, Affin Investment Bank likes the PP:

"We are generally positive on the announcement. We believe there are several long-term benefits from the shares placement".

But strangely enough, Affin doesn't mention at all what happened before regarding the General Offer by PNB. I blogged about the controversial issues regarding this GO.

The independent advise from AmInvestBank was that the price of RM 3.95 was not fair and not reasonable, and recommended shareholders to reject the offer.

So how is it possible that an offer at RM 3.95 is not fair and not reasonable, while a private placement (to a few selected parties, minority shareholders are not able to participate) at a 26% lower price is "generally positive"? To make things worse, the exercise will even cost the company about RM 10 million in expenses.

I wrote about private placements in the past.

David Webb launched his "Vampire" project, and proposed a maximum of 5% of the outstanding capital for private placements at a discount of maximum 5%. In other words, the PP of SP Setia would fail on both of his criteria.

Unfortunately, this is not the only dilution, there will be more. The company announced a "Long Term Incentive Plan" (LTIP) of options and grants, up to 15% of the outstanding shares, which could lead to another 369 million shares.

"Serious Investing" made an excellent post about this.

What I would like to add is that the prospectus of the LTIP was very vague how much it actually would disadvantage the minority shareholders. Although this lack of transparency seems to be normal in Malaysia, it is rather strange, since the disadvantage can be easily calculated:
  • Shares given out for no consideration: the cost is the number of shares times the share price; if the company would buy back this amount of shares (to make the exercise non-dilutive), that would exactly be the cost
  • Options given out: there are valuation tools like Black-Scholes to calculate the intrinsic value of them
The circular writes:

"Only an accounting treatment?" I assure the reader that although there is indeed no cash outflow, there is a very real disadvantage for the minority shareholders, a large dilution, and that the potential cost is not "only an accounting treatment".

People who invested when SP Setia was listed would have done very well. However, that is not a reason to be cheerful about these two, highly dilutive exercises. Minority shareholders will be diluted by about 32%, and that is huge, by all standards.

Although these exercises are brought to vote, realistically minority shareholders have no chance at all to fight them. They should therefore be better protected by legally limiting the size of both private placements and incentive plans (like ESOS and share grants).

And circulars should really give a more transparent picture of the real cost involved for minority shareholders, either in money or in dilution.


  1. The funny thing is the reaction of the market. EPS dilution by 15% and PP's issue price of RM2.94 which is way below current price. I guess people just want to fry it. Or did I miss something?

  2. I stop being amazed by the market reaction anymore.

  3. The private placement is good for the company in the long term eg. reducing the gearing ratio while funding the Battersea project. But the LTIP is not. I wonder if PNB could block the proposal. They seem to be the party which has the most to lose from the dilutive exercises.

  4. Regarding the PP: in my opinion, this is not good at all for normal shareholders, much better would be a rights issue enabling all shareholders to particpate. This would also be very transparant. Paying out dividends implies the company has ample cash, a PP implies it doesnt have ample cash, it simply doesnt make sense. The dilution is really a very heavy price to pay for the minority shareholders.

    Regarding the LTIP: the support of PNB might have been a condition for the founder supporting the previous GO, please see the older postings where "insiders" claimed that this is indeed what was agreed upon. If true, this does pose one very real queston: how can PNB negotiate with the founder with the other shareholders sidelined?