What Is A Capital Raising and Entitlement Offer?
A capital raising on the share market typically means a company is selling more shares to existing or new investors. This often takes the form of a pro-rata entitlement offer, SPP or institutional offer.
Why do companies raise capital with shares?
A company “raises capital” to add cash to its balance sheet, pay down debt or make an acquisition. Or — if it’s burning through cash — to survive.
For example, an ASX-listed company called Rask Group Ltd announces a $200 million acquisition of Finance Ltd. Rask Group Ltd could sell/issue $200m worth of new shares to investors to pay for the acquisition of Finance Ltd. The other alternatives are using debt or current cash reserves.
Common Types of Capital Raisings / Offers
When a company with Australian shares issues capital it can take a variety of forms, including a rights issue or entitlement offer.
- Pro-Rata Entitlement Offer: This usually means current shareholders are entitled to buy more shares in the company. For example, Rask Group Ltd tells shareholders, “you can buy 1 new share at $5 for every 10 shares you currently own”. The ‘Pro Rata’ part simply means that shareholders can buy new shares in proportion to how many they currently own. For example, a 1-for-10 offer means 1 new share for every 10 currently owned.
- Institutional Offer: these share issuances are only for big investors or institutions. Many companies offer shares only to institutional investors because they say it’s easier, faster and costs less to undertake than issuing shares to smaller investors (because the big investors have big money to spend). However, institutional-only offers can be unfair for the little guy, which is usually why companies also do a…
- Share Purchase Plan (SPP): this simply means that new shares can be bought at a pre-defined price. An SPP is often used alongside an institutional offer and is typically capped. For example, “a maximum of $15,000 in new shares per investor”.
- “Underwritten offer“: This means that if eligible shareholders (see below) do NOT take up the offer to buy more shares in the company there is another party (usually a big investment bank or broker) who will buy the shares. This makes it safer for the company to raise capital because they know if you don’t buy some new shares, the underwriter will.
- Non-renounceable / renounceable: Sometimes your ‘entitlement’ or ‘rights’ to buy new shares can be sold or traded to other investors (e.g. via your share brokerage account). Non-renounceable means that your rights (to buy new shares) cannot be traded or sold. Renounceable rights can be sold or traded away (e.g. on the stock exchange like normal shareholding).
What is a bookbuild?
A bookbuild is a process of generating interest for the new shares and selling them to investors. The companies that do a bookbuild are commonly called “lead managers” or “join lead managers”. These are usually investment banks or brokers that know they have many investors who would be interested in buying the shares.
Am I “Eligible”?
Sometimes, only a particular group of shareholders can participate. For example, ‘only current shareholders in Australia or New Zealand’. Check the company’s “Offer Document” for more details.
How do I apply for more shares?
All of the details can be found in a company’s “Offer Document”, which is usually sent out in the mail or can be viewed with a stockbroking account or accessed on the stock exchange website.
This can seem like a wordy lawyer-written document but it often includes the answers to many simple questions like, ‘how do I buy shares?’ or ‘when do I need to apply for shares’.
Log into your share broking account and search for the announcements page for your company. Alternatively, visit the stock exchange’s announcements/company filings page.
Sometimes when you might submit an order to take up your rights or entitlements your purchase will be ‘scaled back’. That means the company received too many offers to buy shares and decided it would limit how many new shares each shareholder receives.
Problems with capital raisings
Issuing more shares to investors to raise money for the company can help it grow.
However, capital raisings can also make your investment in a company worth less than before. For example, if an institutional investor is offered $100 million of shares in your company and you are not invited to buy some for yourself, your investment in the company’s shares is now proportionally smaller because there are $100 million worth of additional shares. That’s called “dilution”.
It’s like cutting a pie into smaller pieces. It’s the same pie — but there are many more pieces.
That’s why it’s important to check whether a capital raising will not only help the company’s balance sheet but also if it is in the best interests of ALL shareholders. The way to do that is to make sure the capital raising will lead to higher profits or earnings PER SHARE (EPS) over time. Obviously, calculating that figure is easier said than done. But the company should do it for you in their presentations — just make sure their assumptions and calculations sound reasonable!
And whatever the case, don’t let your company get away with issuing shares to new investors without offering you (the loyal investor) the right to participate or — at the very least — sell or trade your entitlements to another investor (“renounceable”).
A renounceable pro-rata entitlement offer might cost more but it’s often the fairest for all shareholders, small and large.