I have a few equity holdings - most of my wealth has been transferred through private school fees into the human capital of my children. Enjoy that kids, I will (vicariously) share in your future successes.
Partly due to this impoverishment but partly also because I am more concerned with reducing my golf handicap, I just can’t be bothered much in following equity markets. They of less concern to me than my errant putting.
One stock that interested me of late, however, has been the former Futuris now Elders Ltd. I like stocks with links to Australian agriculture since I believe this sector has great future potential as the Chinese (and others) substitute beef steaks for Peking duck and vegetarian curries. I bought a few Elders on the basis of buying ‘straw hats in winter’.
Elders have had hard times of late – losing $400 million last year – but have sold off a swag of assets and now are seeking a recapitalisation (read they want shareholders to repay their massive and unmanageable debt) and have offered all current shareholders the option of subscribing up to $20,000 worth of new script (and possibly more) at a price per unit of 15 cents. These new shares would rank equally with current shares on issue in about a month.
Existing shares were selling on market this morning for 23 cents which is a 34.7% premium to the price of the new script. There must be a reason for the price disparity but, for the life of me, I cannot see what it is.
In the absence of a clear understanding I sold my holding this morning at 23 cents and will buy what I believe to be an equivalent holding in the next few weeks at a guaranteed 34.7% discount. Have I been silly and missed something obvious?
Presumably the 23 cents per share already has the dilution caused by the new shares factored into it, so if you think the company is worth more than 23 cents per share after adding the new ones, I’m not sure why you sold. I had a similar experience a few years back with Biota. I can’t remember the exact numbers, but I think the share price was more than twice the ones that were to be issued because the new ones were issued before the price had a massive spike.
These shares seem to be perfect substitutes so I am unclear why you would pay more for one that the other. Being a shareholder as of September 4 gave me rights to the new issue – I didn’t have to retain these shares after that date.
As I say I couldn’t see any reason not to take the 8 cents a share pure arbitrage profit. The market did not agree.
“These shares seem to be perfect substitutes so I am unclear why you would pay more for one that the other. ”
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You wouldn’t, and you didn’t take the 8c, since you are essentially selling one asset to buy another — they are independent events happening to the same asset. You could have kept both, and the profit would be the same (i.e., 8c per share on the new ones you bought). If you sell these ones as soon as you get them, and the price is still 23c when they are issued, that might be handy because you will get a capital loss on the 23c ones which will offset your profit on the others.
Wait there I sold shares today for 23 cents and I am guaranteed I can buy the same shares in a few weeks time for 15 cents. Why are the shares today not priced at 15 cents?
Because the shares you can buy are a small part of the total. If I wanted to buy them (or indeed most of the people who are likely to own them in the future), because I think they will be worth, say, 30c in 6 months, I would have pay 23c because I’m not entitled to the new issue. But that is still good value for me, and thus boosts the price. Hence the dilution caused by the issue must be small, or if it is big, getting the money must be a good idea that will help the company prosper a lot in the future (i.e., people think it is a good idea to get the money, even if it causes dilution).
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You need to consider the shares you had at 23c essentially independent of the new ones you are going to buy, and the ones you are getting cheaper as good fortune. Thus the fact you happen to sell the ones you have is neither here nor there on the new ones you are getting.
harry – so if you sell for 23 cents a minute after you take possession of the 15c lot (and why wouldn’t they be worth 23c then) does that mean you’ve scooped up 16c/(23+15)= 42% profit in a few weeks? (assuming your original purchase price wasn’t $14 or something)
FXH, That seems to be right. My assumption is that the shares would immediately adjust to 15 cents but, if they didn’t, I could in fact by an assured $25,000 worth and resell for an assured $8000 profit. There must be something obvious I am missing!
If they were going to adjust to 15c a minute after the issue surely they would have started adjusting now?
So each shareholder can buy up to $20K? So why wouldn’t you sell $20k now buy $20k now and sell a minute after release ? making $8,500K or so for a few mouse clicks?
It seems to good to be true – and you know what they say – if it seems too good ….
Maybe its only for each shareholder – so that institutional shareholders with $quillions still only get a $20k offer?
Jump in – possible Noble Prize in Economics (It’s NOT all in the price baby) and Bravery award for first Economist to back his/her judgement with your own money.
Then you can have an all in wrestlemania with you vs Quiggin, Krugman, Soon and Davidson over efficient markets.
You could get rid of emotion and put in a auto sell/hold.
After you buy the $20ks. Put in some auto sells at 24 cents sell 10%, 25 20%, etc 30c sell 100%
and also on the way down so you get rid of everything before it falls to 15c. And hold at 15c, buy more below 15c if you think its a long term hold?
Mind you I haven’t any idea of PEs, or of quality of company and management etc
“It seems to good to be true – and you know what they say – if it seems too good”
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That’s not correct FXH.
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The issues are almost always at a discount, otherwise they wouldn’t get the money they want. This is the benefit of being a shareholder — generally you get X times the amount of shares you have (often with a limit), which means you will make a small profit on those you buy and suffer dilution on those you have. However, because it is easy to predict how much dilution will occur in many instances (such as when the new issue is massively discounted and therefore will achieve an almost 100% subscription rate), it’s also easy to factor that into the price before the new shares come out (just take the difference between what you think the shares are worth without dilution, add the new shares, and subtract the amount of money made from them). Of course, lots of little investors will take the profit on the day of issue (myself included), so you see higher turnover, but it’s also the case that bigger players take this as a good buying opportunity, since it represents irrational behavior in the long term (i.e., there is selling pressure for no other reason than to sell, not because the company is better/worse).
In this case there is no fixed entitlement – for example – a 1 for 1 or 1 for 2. Irrespective of your shareholding you get the right to buy $20,000 worth at 15 cents. Yes it is true that large shareholders get only $20,000 but – including an institutional placement the number of new shares issued will be more than 2 billion! It is a massive generation of new paper. The offer closes 23 October so plenty of time to wait and watch.
My bet the price will approach 15 cents by then so I a short sale would make sense. If the price stays close to 23 cents I will, of course, follow FXH’s advice and buy up big for a quick resale.
I just looked up Elders, and they look like a disaster to me. It’s no wonder they want the money — it looks like they are on the edge (they are massively indebted), and hadn’t gone anywhere for a decade before their price crashed. Why on Earth did you buy them?
That’s why they are so cheap. Futuris a couple of years ago we selling at over $2. They swapped 1:1 into the new Elders. After the issue and placement goes through they will have debt of about $200m. But, I agree, not for the faint-hearted. I hold other stocks in the agriculture area that are less risky.