Monday, 24 September 2012

FKP's Terrible Corporate Governance Screws Retail Shareholders

This post will cover FKP Property Group's equity raising and their blatant disregard for retail shareholders in relation to their oversubscription facility in their recent equity raising.

As background you may remember that last week I participated in FKP's property raising and it had an oversubscription facility which allowed shareholders to apply for up to $100,000 in over allocations.  At the time I had said that this was a great deal however which came with the significant risk of scale back.  I had experienced a scale back before in QBE's SPP and so I was very wary of this risk.

What FKP announced on Friday was that there was a 76% takeup of the retail entitlement offer however those that applied for overallocations were being limited to 50% of their entitlement offer.

Isn't this one of the risks of oversubscription facilities - why do you have such a problem with it?

It is true that scale backs and caps are a risk associated with equity raisings however if you continue to read the press release you will see the following statement:
The resulting shortfall after the allocation of Additional New Securities is approximately 35 million New Stapled Securities which will be issued to (or as directed by) the Underwriter, Goldman Sachs Australia Pty Ltd, under the terms of the Underwriting Agreement
If you follow the math you will see why I am so outraged at what FKP has done.  Earlier in the release it had the following statement
FKP recieved valid applications....for approx. 165 million New Stapled Securities in respect of their pro rata entitlements, representing a take up rate of approximately 76%
You can see how much of the oversubscription was allocated to shareholders and how much was allocated to the underwriter in the following way
  1. Gross up the number of shares available to be take up: 165m / 76% = 217m shares
  2. Work out the shares available for the oversubscription facility: 217m - 165m = 52m shares
  3. Work out how much retail shareholders got = (52m - 35m) / 52m = 32.8%
  4. Work out how much the underwriter got = 35m / 52m = 67.2%
The reason that this was such a great deal was the steep discount to TERP that these shares were issued at.  The people that got allocated the shares were always going to make a big profit off the shares.  I would have no problem if the shares were way overallocated and I missed out.  I have a massive with the fact that Goldman Sachs made the money even though they already being paid a fee for the undwriting.

It means that retail shareholders could have been allocated up to 150% of their entitlement instead of just 50%.  Benefits like this should flow to shareholders and not to investment banks.

The fault lies with the FKP Board and management

The FKP board and management are to blame for this debacle because one of several things has happened, none of which are acceptable in my view
  1. Goldman Sachs was promised a minimum share of the equity raise provided the share price was above the raising price after all oversubscription allocations had been recieved 
    • This would provide Goldman Sachs with a free option in the shares.  If the share price is above they can make a quick profit.  If it is below then the retail shareholders who subscribed to the oversubscription get allocated the shares
  2. A certain percentage of the equity raising was promised to sub-underwriters who are typically instituional shareholders
    • Sub underwriters are typically instituional shareholders in the company that is doing the raising
    • While this way the value still flows to shareholders the company is making a distinction about which class of shareholder gets the benefit
    • As usual it is the retail shareholder who has no voice and suffers
What should FKP have done?

There are a lot of options that FKP could have undertaken to make this acceptable including:
  1. Not allocated any shares to the underwriter
    • The benefit that is therefore meant to flow to retail shareholders does flow to them
  2. If the provision of a certain proportion of shares (or cap on overallocation) did exist it should have been disclosed to shareholders
    • If I as a retail shareholder was never going to get more than 50% overallocation, I would not have submitted more money than I needed to. 
    • However the company got the benefit of this money for a month so if this is the way in which it was done I think this is particularly deceitful
  3. Not treated classes of shareholders differently
    • I can guarantee you that institutional shareholders and the institutional component of the equity raising would never have been treated in this way.
    • Institutional shareholders have a voice with companies whereas retail shareholders do not
What can be done?

Unfortunately not a lot can be done at this point.  However as a retail shareholder you can voice your displeasure by:
  • Writing to management and the board and asking them for an explanation
  • Voting against board members at the AGM
  • Keeping track of all board members and voting against them for all future boards they may wish to sit on
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