Q: In the case of insufficient take-up of the rights offer by all shareholders, why are current BDM investors not entitled to apply for more shares than their initial entitlement (based on the number of shares already owned by them)? Put another way, why are existing shareholders not afforded preference over eg. underwriters in recognition of their loyalty to the company even through tough times?
A: The structure of the underwriting agreement resulted from a complex negotiation between the underwriters and the company. One of the non-negotiable terms was that applications for excess shares by existing shareholders would not be considered, in favour of allocating shares to the underwriters - the underwriters have agreed to secure the much needed increase in the rights offer quantum following a partial offer to minority shareholders at a premium to the rights offer price.
By way of background: Under the JSE Listings Requirements:-
- BDM complied with the definition of a rights offer i.e. an offer by BDM to existing shareholders to subscribe for BDM securities in proportion to their holdings
- A rights offer may include the right to apply for excess securities subject to such right being transferable upon renunciation of the Letters of Allocation.
A Macquarie First South analysis on rights offers over the last three years (i.e. from 2008 to date) reflects that, amongst others, Aquarius Platinum as well as Lonmin, Pioneer Foods and recently Illovo did not allow for excess applications in their rights offers.
The context of the rights offer is a further consideration in our decision:
- BDM was in a financially ‘compromised’ position. Brait and Coronation were the only shareholders willing to step up to the plate and assist BDM, by extending bridging finance and tangible support and still agreeing to a partial offer which would include all shareholders and allow them an equal initial opportunity to participate in the rights offer.
- Brait’s and Coronation’s partial offer to BDM shareholders has made it possible for participation even by those shareholders who may not otherwise have been in the financial position to follow their rights (via the 99.61% cover). In all likelihood most shareholders including certain major shareholders would not have been in a financial position to follow their rights, to the detriment of the group.
- Through the underwriting agreement as is Brait and Coronation have at least been given certainty that they can align their interests to that of BDM (i.e. protect their investment) as well as some certainty as to the pricing and outcome of the rights offer in order to ensure that their investment in BDM - through the acquisition of Westbrooke’s and Interactive’s shares and a partial offer to remaining shareholders on the same basis- would not be lost in the event of BDM shareholders electing not to follow their rights.
In the context of BDM particular circumstances, including real uncertainty as to whether BDM would have made it to a rights offer without Brait’s and Coronation’s involvement - keeping in mind immediate liquidity concerns, calls on funding obligations and inability to meet timelines for getting a rights offer circular in place – this structure was deemed the only viable option for the group and all stakeholders.