Accelerated Renounceable Pro-Rata Entitlement Offer - TABCORP - Case Study Example

Business: Name: Course: Code: Date: Accelerated renounceable pro-rata entitlement offer The accelerated renounceable pro-data entitlement offer is also referred to as transferable or tradable (Ira et al. p.23). They further indicate that these are rights issued to an existing shareholder are transferable on the open market, and are able to be sold separately from the share to other investors during the life of the right. This nature of rights giving grants the issuer fast entrée to capital markets without shortcoming smaller investors. In his journal; Australian Petroleum Production and Exploration Association (APPEA), Healy affirms that pro-rata rights are also known as pre-emptive rights or rights of first of refusal or right of first offer. Healy states that the right often consent early investors to prevent being diluted in prospect investment rounds. Other definitions that have been used in the journal are the entitlements and Jumbo right. In the traditional of renounceable rights there are some essential steps, that take place i.e. the adjustment of the stock value on the ex-date; addition of the rights class to the index. This should be the theoretical Ex-right Price (TERP) in the head line tax less the cost of subscription. Upon convention of the rights to completely paid ordinary shares, the right lass are drop following subsequent increment in the headline stock during the last trade price. The rights issue endows with a way of raising new share capital through offering to already existing share capital or through inviting the shareholders to cash subscription for new shares. These new shares are issued in proportion to existing share holdings i.e. rights issue on a one for five bases at 250c per share requires that a firm asks an existing shareholders to subscribe for a share for every five shares one holds, at a cost of 250c per new share (Michael, p 116). One advantage of Accelerated renounceable pro-rata entitlement offer that would assist TABCORP is that it is intended to raise more funds quickly than through the use of traditional rights issues. It does not require a prospectus or a statement of product disclosure. Accelerated rights involve disbursement of securities by an entity through two tranches i.e. the institutional investor and the retail investor. Issuances of securities to the investors can be completed faster compared to issues to retail investors. The rights issues of the accelerated renounceable pro-data entitlement offer enable entities to heave funds in a short span of time as compared to the traditional rights issue. The corporation Act section 708AA permits pro-rata rights issues without associated disclosure to investors. The class order broadens the disclosure relief. On the establishment that accelerated renounceable pro-data entitlement offer can be done without compromising the principal of equal opportunity that is associated with the rights investor protection features in regard disclosure exemption. The order relief of the class is applicable to both interests in a managed scheme of investment and quoted securities. In order gain disclosure relief advantage under class relief, in an entity has a wish in issue securities under accelerated renounceable pro-data entitlement offer to institutional investors way before retail investors this should be done within two months prior to the second mention issue. Despite having some advantages there are some shortcomings that are attached to accelerated renounceable pro-data entitlement offer. Among the short comings is the issuing of shortfall securities from the rights issue exclusive of disclosure Using a placement to institutional shareholders The private placement is also known as non-public offering it is a funding round of securities transacted without an IPO. This is usually done to a few private investors; the securities offered are not necessarily registered with the commission of security exchange ones they are proven to conform to exemption from registration as set in the Security and Exchange Commission (SEC) and the security Act of 1933. Majority of the private placements are issued under Regular D Rule, they may typically consist of stocks, preferred stocks or shares of common stock and other types of membership interests like the pension funds. The buyers are usually institutional investors like the insurance companies and banks (Michael, p.113). Some other source of finance that could be used by TABCORP are the private placement offering. They denote investment in a publicly held company. The private equity firms that invest in companies that publicly traded most often use acronym PIPEs in describing the activity. The private placements are not necessarily obliged to register with the SEC since public offering is not involved. Placements of share are where shares are held by a small number of individual in a private company. Contrast to public company where the shares initial decides go to the public later sold to general public. In placement of shares the shareholders cannot freely sell their share to the general public. Most IPOs have two tranches of shares, one of which is the public tranche and the other the private tranche. Share in this private tranche are normally placed with institutional buyers like the private equity firms, the banks and the big investors. On the other hand in the public tranche there are the public offering, this is where people ballot through ATMs or internet banking. Pro-rata Rights Issues The word pro-rata is Latin which means dividing proportionate to certain interest rate i.e. when a company has two shareholders with one shareholder holding 25% and the other 75% of the company shares receiving a gift of a given figure in a similar proportion (Keim & Madhavan, p.32). The journal by Keim & Madhavan further gives advantages and disadvantages of pro-rata rights issues as illustrated; The pro-rata rights issues have many potential advantages to companies as compared to secondary offering issued for the ordinary Shares. The equitable method used to offering all the existing shareholders with opportunity to purchasing the shares. The backstopped Pro-rata rights issues provide a company with assurance of execution. The majority of the rights issues feature investment bank to synchronize the rights issue and help the company to gain interest in the rights. The commissions made from sales that are attributed from rights are typically lesser than underwriting the commissions for share placing. Additionally, pro-rata rights target the existing shareholder but not new investors and the road show expenses being generally lower than shares offered on secondary presentation of ordinary shares. Availability of larger placings often requires shareholder approval and their receipt are not certain since they may engage major holdup to a company’s fiscal plans. Presently, however, changing and the FSA asks for a letter elucidating the reason for some jurisdictions exclusion. Underwriting According to Hank (p.130), underwriting is an agreement between a company and a financial agency, that ensures the public subscribes for entire shares or debentures issue made by the company. Some of several factors that would lead to TABCORP use underwriting as a mean of gaining more finance for it expansion is several advantages of underwriting as the risk and uncertainty of securities in the market, provision of publicity services to the company, specialized and intimate knowledge regarding the capital market, financing of newly established enterprises and expansion of the already existing projects and building of investors’ confidence on securities issue. When raising capital through issuance of rights, the TABCORP would seek certainty of funds through an intermediate underwriting process. The company would use bank as an intermediary or a syndicate of banks which will provide insurance to the effect that the fall of share price to an extent that the shareholder fail to exercise their option to implement their rights. Ira et al. (p.37) indicates that it is the intermediary that presents the company with funds. The main of TABCORP is to lay off the risk just as the insurers take care of large risks. Normally, the risk is passed on to the already existing long-term shareholders who are pre-disposed to obtaining more shares at the issue price or through sub-underwriting agreements. The company put into consideration the non-share holders who are also viable for sub-underwriting fees commonly paid by the insurer. These fees include that paid to the lead underwriter to cater for the risk that he is liable to take up all or part of the issue if it has not been fully subscribed. As a fore mentioned these risk is often wholly or partly laid off with sub-underwriters having to adopt all or a percentage of the risk for the period of the issue. Significantly, lead under-writers often pay the sub-underwriters part of the fee assumed. There are four components that make up the gross underwriting fees i.e. the bundled fee (covers the underwriting risk, advice on transaction and the on-going corporate advice (Hank, p.133). A part from the advantages of underwriting there are some risks that are involved in underwriting i.e. the share of the issuing company may fall; the fall can result from market falls or reasons that are solely companies, they leads to a dubious level of subscription. Another disadvantage may be the over-optimistic issuer on the market and underestimated negative reactions to the right issue. Book build sale process This is basically a process that is used in the Initial Public offers (IPO) for efficient discovery of price. Book building is a mechanism whereby the time the IPO opens bids are taken from the investors at different prices which are normally equal or above the floor price. The bid offer is determined after the closing date of the bid. It is an option to TABCORP that can be used to raise capital through IPOs or the Follow-on Public Offers (FPOs) in order to aid in price and demand discovery. The process is usually directed to both the institutional and retail investors. The issue price is often determined after the closure of the bid which is based on the demand created in the practice. On the institutional entitlement offer the shareholders are offered with the opportunity to subscribe for pro-rata entitlement to shares on a fixed price offer. They are required to decide on whether to renounce their entitlement or accept it within a given period of the launch. On the second account the institutional entitlement give a book build sale procedure under which the sales that are not taken by the institutional shareholders under entitlement offer are later offered for sale to the institutional investors (Kalay. et al. p.87). Extra book build price which is above the fixed offer price is paid to the institutional shareholders who fail to take their entitlement. Retail shareholders are the shareholders who are not entitled to participate in the entitlement offer. They are offered an opportunity to participate under a prospectus lodged with the ASIC. Retail shareholders are given a preference to take up either all, part or none of the entitlement; they receive similar pro rata entitlement to new shares with the institutional shareholders at similar fixed offer price. Kalay. et al. (p.87), further add with continue in their illustration on the process of the retail entitlement offer, a process of book build sale progression is undertaken under which the share that are not taken up under the retail entitlement are availed to institution investors. Excess book build price above the fixed price is paid to the retail shareholders who fail to take up their entitlement. Reference Hank, G. “Underwriting: What Every Producer Must Know” Oxford: Oxford Centre for Staff Development, 2009. Healy, Guy. “The Australian Petroleum Production and Exploration Association (APPEA), journal: Volume 46, Issue 1.”Australian 18 Jun. 2008: 21. Print. Ira W. Lieberman, Christopher D. Kirkness Privatization and emerging equity markets 1998 Kalay, O. Sade, D & Wohl A. ‘Measuring Stock Illiquidity: an Investigation of the Demand and Supply Schedules at the TASE’, Journal of Financial Economics 74, 2004. Keim, B. & Madhavan, A. ‘The Upstairs Market for Large-block Transactions: Analysis and Measurement of Price Effects’, Review of Financial Studies 9, 1996 pp. 1-36. Michael J. “The UK financial system: theory and practice.” Cincinnati: South-Western Publishing 1999 Smith, C. ‘Alternative Methods for Raising Capital: Rights versus Underwritten Offerings’, Journal of Financial Economics 6, 1977. Wruck, K.R. ‘Equity Ownership Concentration and Firm Value: Evidence from Private Equity Financings’, Journal of Financial Economics 23, (1989). Read More