Temasek-linked companies pumped in $5.2b cash and the amount is now worth almost double
UNTIL a few months ago, investors were generally too shell-shocked by events in the past 18 months to have any confidence to part with their hard-earned cash and dump it in newly listed stocks. Not helping was the fact that most companies seeking to list in the past 18 months or so were relatively small and Chinese companies. Memories of S-chips that have blown up in investors’ faces are still painful.
So, it is no surprise that Opera – the Monetary Authority of Singapore’s website where the prospectuses of companies that intend to sell their shares to the public are lodged – shows that no fewer than 16 companies have withdrawn their listing applications since the start of 2008.
Meanwhile, the uncertain environment last year and in the early part of this year, with the seizing up of credit sources, made it necessary for many listed companies to tap shareholders for fresh funds. Investors seem to be more receptive to putting their money in tried and tested names that have a track record as listed entities. Either that, or more likely, punters had no choice but to pump in more cash – just to ensure that their stake in companies in which they had already invested was not diluted.
So far this year, the amount raised through initial public offers (IPOs) totals a minuscule $32 million. On the other hand, the amount raised through additional equity offerings by listed companies, or placements of new shares, is in excess of $1 billion. Placements of new shares with new investors, of course, dilute the stakes of existing shareholders – worse still if the placement shares are priced at a discount to the prevailing market price.
However, the biggest ‘sucker’ of liquidity or cash from our market has been rights issues. In all, $7.6 billion has been raised through rights issues so far this year. And this came after $7.2 billion was soaked up by companies via rights in 2008. Placements of new shares were significantly less last year, at $600 million. IPOs mopped up $1.7 billion, while OCBC and UOB groups’ preference shares raised $3.8 billion.
Most rights shares are pitched at a significant discount to market prices. This has the effect of forcing existing shareholders to subscribe. Investors who don’t cough up cash will see their holdings worth significantly less than before.
For example, a company that has 100 million outstanding shares wants to raise $50 million. Its shares are trading at $2. It could have a one-for-two rights issue, and price its rights at a 50 per cent discount, or $1. Or it it could have a one-for-four rights issue at, say, the prevailing market price of $2. In either case, the company could raise $50 million. But in the second case, existing shareholders are not compelled to subscribe to the rights, since there is no discount and arguably no dilution. Investors who want a bigger share of profit will pay the market price for the additional share. One lot of shares in the company would still be worth $2,000 after the rights issue, everything else being equal.
In the first case, however, if an investor does not subscribe to his rights entitlement, his 1,000 shares would be worth only $1,666 after the rights issue.
As can be seen from the table, this is generally the case. Companies that priced their rights issues at smaller discounts tended to have lower acceptance rate. There are, of course, exceptions. These were when the prospects of the companies were deemed not so bright, so even a deep discount could not entice shareholders to top up their investments. Or, demand for cash is so great that shareholders just don’t have the resources to oblige. Burwill, for example, had a nine-for-five rights issue – that is, you got nine rights shares for every five ordinary shares you already owned.
Now I come to the crux of this article. Out of the $14.7 billion raised via rights issue since 2008, Temasek-linked companies (TLCs) accounted for $12.4 billion or 84 per cent. TLCs are generally bigger than the average listed company on the Singapore Exchange. And with their recent round of fund-raising, these big boys just got bigger.
One market observer pointed out that unlike the TLCs, none of the bigger family-run companies has had a rights issue in the past 18 months. Of course, OCBC and UOB raised billions of dollars through preference shares last year. But other than that, the likes of City Development and the stable within the UOB Group have not launched rights issues to date.
One reason could be that Temasek has deeper pockets than the average tycoon family. The amount of cash that Temasek and its stable of companies have had to cough up since 2008 to meet cash calls totalled a whopping $5.2 billion. But as things turned out, that $5.2 billion has almost doubled to $10.2 billion as at yesterday, based on Friday’s closing prices of the stocks.
Minority investors who have subscribed to their rights entitlements have also done well – and better still, those who applied for excess rights and were lucky enough to be allotted them.
Chartered Semiconductor, for example, is now worth more than twice the price of its rights issue. Similarly for CapitaLand. But the shares of some companies that launched rights issues in the early part of 2008 are still trading below their rights issue price.
Rights ‘windfalls’ to investors notwithstanding, the more important question – the multi-billion dollar question – now is how wisely TLCs use their cash going forward.
Source : Business Times – 25 July 2009
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