Under the Companies Act 2006, pre-emption rights allow existing shareholders the ‘right of first refusal’ when new shares are issued. According to 561(1) of the 2006 Act, shares cannot be offered to another person until an offer has been made (on the same or more favourable terms) to each existing shareholder, and any time limit given for the offer has expired.
At its core, this enables such individuals to protect their existing shareholding against further dilution of their shares – but typically in proportion to the shareholding owned.
The Companies Act has protections for minority shareholders for a reason. Companies can (in normal circumstances) get approval at their AGM to issue a limited amount of new equity.
Ocado is not bust. It has a £14bn market cap and debt of only £558 million at the end of last year (source https://www.hl.co.uk/shares/shares-search-results/o/ocado-group-plc-ordinary-2p/financial-statements-and-reports). Ocado is in fact booming and needs some more cash to invest in more warehouses.
Ocado, advised by Goldman Sachs, JP Morgan and Numis, has raised £1bn made up of £650 million placing of shares to institutions and £350 m of debt and £7.1m of shares via the retail offer via Primary Bid.
They say “Prior to launch of the Placing, Ocado consulted with a significant number of its shareholders to gauge their feedback as to the terms and conditions of the Placing and Convertible Bond Offering. Feedback from this consultation was highly supportive and as a result the Board chose to proceed with the Capital Raise. The Capital Raise structure, which is consistent with the latest recommendations of the Pre-emption Group, was chosen as it minimises costs, time to completion and use of management time at an important time for the Company to pursue new growth opportunities. Ocado is pleased by the strong support it has received from new and existing shareholders, including a number of retail shareholders via the Retail Offer, and bondholders.”
I cannot go to war on this case, as
- the offer was priced at a 5.7% discount, but today the share price has dropped to 1948p, which is below the 1960p price of the placing; and
- the dilution was only 4.7%.
Nevertheless, one has to question why a rights issue was not done. The book build will have given institutional shareholders the chance to maintain their stake without dilution. The Primary Bid offer was limited to €8m (about £7.1m), so retail shareholders were always going to be diluted.
Mark Bentley, my fellow ShareSoc director has a different view to me: “My view, FWIW, is that this placing (< 5% of issued shares) is too small to justify the costs associated with a rights issue (especially underwriting costs). That size of issue without pre-emption rights would fall within the pre-emption group’s guidelines, irrespective of Covid-19. No one should be too upset. I wouldn’t be unhappy if I were an Ocado shareholder.”
The point Mark makes is a fair one.
However Looking at this more there are other points to make. This is a company with a turnover of only £1.7 billion , EBITDA of £43m and “adjusted” profit of minus £94m (ie a loss). The loss has increased from £33m the year before.
With a market cap of £14bn, surely it could quite easily raise £1bn of debt? So why did the advisers insist on £657m of equity and £350m of debt?
I have a sneaking suspicion that some people think this never will be hugely profitable business. The Ocado average basket is £106 and if I remember the Supermarket REIT presentation correctly the average delivery costs £15 to deliver (NB charges are different to costs!).
I don’t own Ocado but I do own quite a bit of Supermarket REIT. It is the only property company I own but it is a special case and is up 11% in the past year plus >5% dividend. Please note I am not qualified to give financial advice.
Cliff Weight, Director, ShareSoc