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placements or cash issues

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    PLACEMENTS or CASH ISSUES.
    (Written for the CMQ placement)

    Retail shareholders tend to discuss this issue from time to time:

    1. Placements.
    These can be made within 24 hours, existing trading is interrupted by a 'Halt' and the Placement to Institutions and 'Sophisticated' Investors proceeds.
    Discounts at 10% are common. Mminion pointed out that in the CMQ issue, an agreed valuation may have been arrived at first before the discount is applied.

    Once the share price reaches a certain level then a Placement is often preferred. Say the NRT share price is $8. The placement of $40 mill. will be made at $7.20. This requires 5.6 mill. shares, not a large amount. Assume there were 98 mill. shares before placement. Then there will be 103.8 mill. shares after the issue.

    The theoretical share price immediately after restart of trading is [ 98*8 + (5.6*7.2)) /103.8]=$7.94, only 6 cents less than previously. So, speed is a major positive issue. If the placement is successful then that will be expressed in the share price once trading restarts. Only 1 broker is needed. Note that some expenses have been excluded.

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    2. Cash issues.
    These often require an underwriter and one or more brokers. A Prospectus is required and the lead time from Announcement to the completion of the cash issue is considerable.
    This can create risks. The share price may drift lower due to bad news of any description. A few heavy fals in the Dow is all what is needed. Occasionally the Issue price may have to be reset.'
    It may affect Management issues particularly if prices fall during the waiting of a cash issue being completed.

    Retail shareholders won't pay $7.20 (See above) particularly if the share price sags so say the Issue of $40 mill. is made @ $6.50. So about 6.2 mill shares are issued. I have not include fees to be paid to the underwriter and the costs of printing and lodging of the prospectus.

    What does a retail investor gain if a cash issue is made?
    As mentioned, $40 mill is needed and a total of 6.2 mill shares are to be issued. The share price prior to the issue is $8- Assume this remains so (not necessarily).

    Current number of shares: 95.5 mill. Assume we have 98 mill. shares when the cash issue is announced. There will be 104.2 mill. shares after.
    So, the isue formula is: 98/ X *6.5=40 or 1 share for 15.925 shares held at $6.50. It is clear that it is not a goldmine for the investor:

    Assume he had 15.925 shares at $8 before the Announcement. He gets 1 extra share for $6.50. The ex issue price: [15.925*8 + (1*6.5)/16.925=$7.91. (This compares with $7.94 if a placement took place).

    So, the retail investor gained $7.91-$6.5 or $ 1.41 on an outlay of $127.4, a return of 1.1% over a period of say 5 weeks.

    Summary: In the Placement 5.6 mill shares are issued. It wil be slighly higher with costs. Although 6.2 mill. shares are issued in the Cash issue, in reality, costs are higher than those in a Placement.

    As share prices rise, fewer shares are needed to raise the same amount of cash. Above a certain price level, the number of shares required is so low that the advantages of a Placement become obvious.

    Gerry

 
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