Read the following newspaper article: Investor prepares for fight as Transurban
ID: 2464021 • Letter: R
Question
Read the following newspaper article:
Investor prepares for fight as Transurban issues shares
Transurban’s largest shareholder has failed in an eleventh-hour appeal to halt an allotment of newly-issued shares to institutional investors but will get a chance to air its grievances before the takeover’s umpire.
The Takeovers Panel yesterday rejected a request by the Sydney fund manager CP2 for interim orders — similar to a temporary injunction — seeking to halt the $542 million share issue. However, a panel will be appointed to consider the shareholder’s application for final orders against the raising, which Transurban wants to use to pay for its $630 million purchase of Lane Cove Tunnel.
The latest dispute between Transurban and its largest shareholder creates further instability for the toll-road company, and raises fears of a protracted stand-off.
A day after Transurban’s embattled chairman, David Ryan, attempted to quell a push for board scalps, CP2 went to the takeovers umpire saying the company’s rights issue ‘constitutes frustrating actions’.
The fund manager, which owned just under 15 per cent of Transurban before the capital raising, joined two Canadian pension funds in unsuccessfully trying a $7.2 billion takeover offer for the toll-road group two weeks ago. CP2’s stake will be diluted because it did not participate in the share issue.
Yesterday CP2 said Transurban had conducted the rights issue in a ‘misinformed market’ and the timing of the sale precluded the Canadian-led consortium and overseas investors from participating. It wanted shareholders to be able to vote on the capital raising and, if it went ahead, the institutional entitlement offer to be reopened.
However, this appears impractical given the new shares can be traded from today.
Andrew Chambers, an Austock analyst, said there had been mixed messages from CP2 because it wanted the rights issue stopped while it was also seeking to reopen the institutional offer. ‘There seems to be mixed objectives, which always create uncertainty for the stock’, he said.
Transurban and CP2 declined to comment yesterday because the matter was before the Takeovers Panel. However, Transurban said its capital raising was proceeding as planned. Shares in Transurban closed down 11c, at a seven-month low of $4.30.
Source: Matt O’Sullivan, Sydney Morning Herald, 26 May 2010.
Required
A. Distinguish between a rights issue and a private placement.
B. From the above article, what appears to be the problem voiced by Transurban’s largest shareholder against the share issue?
Explanation / Answer
A.
A rights issue is an issue of new shares to existing shareholders, based on their proportionate holdings of existing shares. Only if the terms of the rights issue are renounceable will new shareholders be able to acquire shares in Transurban.
A private placement is an arrangement whereby shares are sold to new or existing institutional shareholders who have negotiated to buy a block of newly-issued shares in the company. There is no requirement for the placement to be proportional among existing shareholders.
B.
The issue is one of control. In a rights issue, shareholders normally hold the same proportion of shares after the issue as before. Not so in a private placement. New or existing institutional investors may privaely acquire enough shares to reduce the control of other existing shareholders and therefore increase their own control. It appears from the article that CP2 was more interested in being part of a private placement with Canadian pension funds so that its influence over Transurban would rise, rather than being part of a rights issue where its influence would remain at approximately 15%
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