If you’ve read my previous scribblings in this column it will be clear that as a communications and investor relations firm Walbrook PR is an ambassador for the rights of the smaller investors.
I’ve written about the need to communicate well with smaller investors as well as the big institutions, shown how nominee accounts destroy shareholder rights, bemoaned the lack of access to consensus forecasts for us mere mortals, and have championed the need for more open offers.
Surprising then that on this occasion I’m arguing why it is sometimes necessary for company directors to swallow hard and make the decision to cut private investors out of a fundraising, but do so for the right reasons.
As I’ve stated before there should be more open offers. Private investors are the key marginal buyers for smaller companies, moving share prices more regularly than institutional investors who rarely buy and sell shares in the open market.
Including them keeps them enfranchised and treats them fairly. But this isn’t always possible for companies who are aiming to deliver growth to shareholders and in doing so have an active acquisition strategy.
Sometimes a company will come across a potential acquisition where speed is of the essence. A fantastic deal is likely to attract other buyers or there may be a clearly defined auction process and to make it to the position of preferred bidder a company needs to be able come up with the cash quickly and remove all possible levels of uncertainty from the equation.
Sadly for these very reasons a pre-emptive share issuance, be it an open offer or rights issue, would add additional time to the process and could also add the conditionality of share approval which might be the ultimate stumbling block for someone looking for a quick sale.
An important factor that will influence the level of discontent is always the price that a placing is concluded at.
Any placing discount of over 10 per cent is going to irk private investors but shareholders need to appreciate that the PLC has zero control over the price. The price is determined by a book-build of investor interest at certain prices and so is entirely dependent on institutional investor demand.
Companies have to carefully balance the attractiveness of the transaction, against the pound of flesh that will be demanded by the fund managers who have the ability to write the big cheques, and at the same time consider the ultimate benefit of the transaction to the wider investor base.
This approach doesn’t mean slipping into an equity investment version of Jeremy Bentham’s utilitarian “greatest good for the greatest number” but actually supports a more inclusive and less short-sighted view which asks “what is the greatest long-term good for all”.
A similar situation was seen last week with Aberford-based engineering specialist Renew Holdings who bought complementary rail infrastructure company QTS group Ltd for £80m. Speed was clearly of the essence; their presentation shows that they started meeting fund managers on Tuesday May 1 and the deal was wrapped up and announced publicly the following Wednesday. The £45m placing was done at a 14 per cent discount to the share price and some private shareholders have grumbled at the discount, but Renew describe the acquisition as a “natural fit” and “materially earnings enhancing”.
Company directors know that ruling out an open offer will cause discontent from private investors and so the challenge is to communicate why the deal is so attractive and why it was important to move so quickly in the interest of delivering long term value for all.