Freightways recently raised $45,000,000 capital in a placement to institutions at a significant discount to the market price. They also offered non-institutional investors a Share Purchase Plan (SPP) at the same price, limited to an aggregate of $5,000,000. Each small investor was allowed to subscribe for a total of $12,500 worth of shares at the same placement price. When the SPP was announced I took a look at the numbers. In the 2008 annual report there were a total of 6,423 shareholders listed. I did some basic calculations:
|Number of share-holders||6,423|
|Pool available per share-holder||$778.45|
|Shares available per share-holder||319|
These figures imply an assumption by the directors that most small investors would not participate in the SPP. Otherwise they would either allocate a greater pool to the SPP or wouldn’t allow investors to subscribe for $12,500 of new shares. I suspected that the SPP would be over-subscribed.
Freightways has just announced that it was oversubscribed: by 1,040% !!! The total amount provided by small investors was $57 million, which is more than the total capital raising combined. This shows that it was completely unnecessary to dilute the share-holdings by giving institutions such a great deal. Essentially the institutional investors have received a great bargain at the expense of small investors. It would be more equitable in this situation to have done a renounceable rights-issue. Alternatively accepting a variable sized pool for small investors, similar to Xero’s SPP, would have been more equitable.
In conclusion, I think the directors need to provide some good answers as to how this was decided and executed.
Disclosure: I personally have a small shareholding in Freightways.