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APA Renounceable Rights Issue is Bad for the Small Investor

December 8th, 2006 at 01:46 pm

I received a thick wad of information in the post yesterday about a 2 for 7 renounceable rights issue from Australian Pipeline Trust. The rights are to purchase additional APA shares at $3.75 (a discount of around 15% to the current share price). Sounds OK, doesn't it? Well, yes, for most investors it's OK, even if not the windfall some may think. (As the new shares issued at this reduced price tend to make the share price drop for your current holding, so it all generally averages out - the only real benefit is that the company is getting funding at a better rate than it could get elsewhere).

However, while I'm OK with having to fork out around $3,800 to take up the rights issue (in fact I sent it on to my margin lender today, so the amount will simply be added on to my margin loan balance, so it won't affect my cashflow), some smaller shareholders may find themselves losing out. If they do not take up the offer, then the rights expire with no value, and the underwriter will, in effect, purchase the relevant number of shares that would have been issued. In this case the small shareholder will get no immediate benefit from the rights issue, and will suffer from having the share holding interest in the company diluted by the new shares issued to other shareholders and the underwriter.

Theoretically any shareholders who don't want to take up the rights issue can sell their rights on the market and get a benefit that way. But there are a couple of obstacles facing the smaller shareholders:
* the trading of the rights ends on Monday, and the offer document only arrived in the post yesterday. Any small shareholders who are unsure what to do, or don't currently have a relationship with a broker, doesn't have much time to take action.
* A small shareholder with, for example, $1000 worth of APA shares (around 235 shares) would have received rights to purchase an additional 67 shares at $3.75 - a cost of $251.25. But, if they didn't want to buy more APA shares, then they'd have rights worth AT MOST $33.50. Even at discount brokerage rates it would be hard to sell such a parcel for more than the brokerage costs!

APA has chosen to restrict the rights offer to Australian and New Zealand shareholders, as it would be too expensive to print relevant documentation for other foreign shareholders, given the different laws and regulations applicable to such an offer in other countries. For FOREIGN shareholders, APA will sell the relevant number of rights on market, and send the proceeds to such foreign shareholders.

If APA had the best interests of small shareholders in mind, they would have used the money obtained from the underwriter for all expired rights to make similar payments to any Australian or New Zealand share holders who didn't sell or accept the rights offer.

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