Contact Energy Rights Issue: Management Sells Company Short

Rights issues are typically done when a listed company needs more capital to repay debt or needs money to expand their business when more debt is inappropriate. In the case of Contact Energy Ltd [CEN.NZX] their $350 million rights issue, announced yesterday, will go towards expanding geothermal power facilities.

The only question raised by the announcement though is why the rights issue was set at such a massive discount to the current share price. It is usual to discount rights issue placements but not to the extent CEN shares have been discounted. The $5.05 rights issue price is almost 15% less than the trading price of CEN the day before the announcement.

For some reason management have opted to heavily undervalue the issue and one can only speculate as to why. My cynical side is thinking Origin Energy Ltd [ORG.ASX], the current majority owner of the company at around 51%, is looking to creep their share of the company through the rights issue process - they will take up their full entitlement - but my practical side is thinking that the company already has a massive debt burden of nearly $1.3 billion so simply cannot sustain increased borrowing based on their dwindling customer base and subsequent lower profits, so are choosing to dilute shareholding (if rights are not taken up) to finance normal business activities.

Long term investors need to consider their participation in the rights issue in the following manner. If they do not take up the 1:9 rights offer their current shareholding will be diluted but they are likely to be able to sell them on the NZX. However, joint managers Deutsche Bank Craigs and Goldman Sachs will aggregate the rights which are not taken up in June and sell the unwanted shares in a book-build process.

If shares sold through this process go at a premium to the $5.05 being offered to existing investors, those who opt not to take part in the rights issue will get the difference, proportionate to their entitlement.

Those not currently CEN shareholders thinking of buying CEN shares to participate in the rights issue might want to wait until after the extra shares are issued to see if they can buy at a level closer to the $5.50 issue price but some investors will be gambling that demand for the rights to participate will propel the main shares higher and make the whole process a profitable one.

CEN shares initially increased by 15c on the news yesterday but finished down 1c to finish at $5.85.

CEN Rights Issue Documents


Contact Energy @ Share Investor

Share Price Alert: Contact Energy Ltd
Stock of the Week - Reprise 5: Contact Energy Ltd
Origin Energy asset stripping Contact Energy
Stock of the Week - Reprise 4: Contact Energy Ltd
Stock of the Week - Reprise 3: Contact Energy Ltd
Long Term View: Contact Energy Ltd
Stock of the Week: Reprise 2 - Contact Energy
Stock of the Week: Reprise - Contact Energy
Not so fast Davy Boy
Still Watching Contact Energy
Beam me up Davy
Stock of the Week: Contact Energy
MarketWatch: Contact Energy - June 2009
MarketWatch: Contact Energy - Jan 2009
Contact Energy looks bright during dark times
Share Investor's 2009 Stock Picks
Follow the Monopoly Board

Discuss this stock at Share Investor Forum - Register free
Download CEN Company Reports

Rights Issue Documents


Recommended Fishpond Reading



Buy The Intelligent Investor & more @ Fishpond.co.nz




c Share Investor 2011

Allied Farmers: Rights Issue Decision

News that Allied Farmers Ltd [ALF.NZ] is asking shareholders to dip into their pockets to keep the company from being flushed down the financial toilet (I use this analogy for obvious reasons) is surely going to be a dilemna for them.

If they do put more money into the company they are risking more losses at a time they probably cant afford it but if they don't what is left of their current investment will be further diluted by a 1:3 rights issue at a 50% discount to yesterdays closing price of 4.2c per share. This must be put into the context though that Hanover investors who not only lost most of their dough while involved with that company then lost more than 80% of what remained when they decided to let Allied take over the assets of Hanover.

The company has a market capitalisation of almost $82 million as of close of market yesterday and this rights issue will add nearly 700 million shares to the current nearly 2 billion outstanding.

The market value of the company is less than 20% of what Allied management valued Hanover assets at in the latter part of 2009.

Investors in Allied must decide whether they are going to put good money after bad and this decision shouldn't be hard given the track record of CEO Rob Alloway and his company thus far.

The risk of investment dilution is far outweighed by the risk of losing even more money and investors, most of whom are 50 plus, should not feel pressured by the company or others to risk more of their money in this pig swill of a company.

The only hope you have of getting a return is for you to either sell now or hang on for a recovery at a undermined point somewhere in the future.

This will not be the last request for more money from shareholders as the company is cashflow poor and will need to bolster its balance sheet again least the banks decide to liquidate.

You must of course make your own decision of you are a ALF shareholder but if you are and have read this, please make the wise decision.

Allied @ Share Investor

Allied Farmers: Prosecutions should be on the cards
Allied Farmers Fraud passes with little fanfare
Allied Farmers: What's it Worth?
Hanover, Allied Farmers deal more of the same


Related Share Investor reading

Hanover's "White Knights" are really daylight robbers
Hanover collapse: It was just a matter of time
Money Managers Saga: 3 Story wrap
Money Managers gives First Step investors the middle finger
Greed is bad: Geneva Finance Folds
Financial 101: Learn before you leap
Kevin's Blog

Discuss this topic @ Share Investor Forum - Register free


From Fishpond.co.nz



Buy Every Bastard Says No - The 42 Below Story, by Geoff Ross & Justine Troy & more @ Fishpond.co.nz




c Share Investor 2010

Capital raising set to become popular in 2009

As a shareholder are you feeling generous towards the companies you have in your portfolio?

Whether you are or not you may have to make a choice to chase what could be good money after bad in 2009.

The dearth of cash and credit available from normal sources-like banks-to keep businesses running, especially during the current recession, is undoubtedly going to lead to some New Zealand listed companies putting out their caps to shareholders to enable them to keep trading over the difficult times to come.

There will be some capital raising through; debt raising via bond issues, rights/cash issues and or private placements with big institutions.

Usually the domain of start up companies and especially popular during the tech bubble of the late 1990s, the terms for rights issues and other forms of capital raising was relaxed by the NZX on November 26 2008 as an answer to the credit crunch.

Both rights issues and private placements dilute existing shareholders shareholdings and of course extra debt laden onto company balance sheets through alternative methods of capital raising will impact somewhere down the line.

I would favour a rights issue or private placement myself.

I could speculate here and name a few names that might be ready to pass the begging bowl around-I am not going to-but we can be fairly sure that any company with high to medium borrowings set to mature soon and without sufficient sales and or assets to allow themselves the ability to borrow off a bank is going to have to go to shareholders with the bowl.

Of course the length of time the recession plays out will mean more companies will need to avail themselves of shareholder cash or other methods of capital raising.

There is no guarantee of course that shareholders would be willing, or able, to take a further risk by contributing their hard-earned cash and this shareholder will certainly be wanting the bargain of the century before he plunks down further cash towards any company in the Share Investor Portfolio.

The million dollar question remains though and is a more than likely scenario. What happens if the cash isn't forthcoming?

Short of a mysterious benefactor, one of those struggling investment banks or an angel investor ready to take a big slice of the company, the answer is of course bankruptcy.

Time to get out the checkbook?


Recent Share Investor reading

Long vs Short: The Warehouse Group
February 2009 reporting season to headline a bad year
Share Investor's 2009 stock picks

Shareinvestorforum.com - Discuss this topic

Related links

NZX release on capital raising relaxation (PDF)


From Fishpond.co.nz



Buy Every Bastard Says No - The 42 Below Story, by Geoff Ross & Justine Troy & more @ Fishpond.co.nz






c Share Investor 2009