Why private investors could be left out

Paul McManus, Managing Director, Walbrook PR
Paul McManus, Managing Director, Walbrook PR
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If you’ve read my previous scribblings in this column it will be clear that as a ​c​ommunications and ​i​nvestor​ ​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 ​o​pen ​o​ffers.

Surprising then that on this occasion I’m arguing why it is sometimes necessary for company ​d​irectors 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 ​o​pen ​o​ffers. Private ​i​nvestors are the key marginal buyers for smaller​ ​companies, moving share prices more regularly than ​institutional ​i​nvestors 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 ​o​pen ​o​ffer or​ rights ​i​ssue, 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 ​d​irectors know that ruling out an ​o​pen ​o​ffer 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.