Chairing a dud deal?
Sappi CEO Ralph Boëttger
IT WOULD BE an exaggeration to say that big tree Sappi – South Africa’s largest fine paper and pulp producer with a major presence in Europe – is about to come crashing down. But it’s no exaggeration that Sappi is probably taking the biggest risk in its history with its planned acquisition of Finnish coated graphic paper producer M-real for €750m, almost R9bn at the current exchange rate.
An indication of the risk was made public last Friday, when Sappi released details of its rights offer to raise €450m (around R5,8bn) to help fund the acquisition. First surprise – shock, to some minority shareholders such as Theo Botha – was that Sappi would be issuing 286,9m new shares, more than doubling the 239m shares already in issue.
Second shock was that the reason for issuing so many new shares was because Sappi was offering them, at a ratio of six new shares for every five Sappi shares held, at 2027c/ share – a huge discount of 65,2% to the closing price of Sappi on 6 November of 5825c/share.
Sappi’s price has since fallen to 5400c/share (last Wednesday), a sign perhaps that the market isn’t enamoured with details of its rights issue.
CEO Ralph Boëttger says he realises the offer may be confusing some people, but says the discount “isn’t far off where recent rights issues have been. We needed to achieve what we wanted now. Final details of the rights offer were only worked out shortly before we published the announcement”.
Botha isn’t convinced: “There’s been a lack of transparency that’s misled minority shareholders. It’s totally wrong we were asked to support a rights issue with no indication of the discount. In my opinion Allan Gray and RMB (the two largest shareholders in Sappi) had an inside track on this deal.”
Boëttger denies that. “Allan Gray and RMB didn’t know the discount. But maybe they worked it out for themselves.” He adds shareholders should have had some idea of the number of shares being issued when asked, at the recent AGM, to place 1bn new shares under the control of directors.
But the rights issue does have a sense of desperation about it. This isn’t an easy market to raise equity finance in but, in effect, Sappi is devaluing the group by offering new shares at such a large discount.
“That’s confusing,” concedes Boëttger. “If we issued shares on the open market at R21 that would be stealing from our shareholders. We expect the share to trade at about R36 after the rights issue. We’re setting a new base for Sappi’s share price.”
He insists the rights issue is economically neutral for existing shareholders. “There will be no dilution for existing shareholders who follow their rights. Though the share price will have a new base, in theory the value of the group goes up by as much as the capital we raise. The thinking behind the rights issue has always been that we don’t prejudice shareholders.”
In theory, yes. The price new shares are offered at should be neutral – if the price behaves the way it’s expected to after the new shares are issued. But there’s far more at stake here than the large discount. Is Sappi making a good investment in Europe? When the deal was first announced, Finweek asked how Sappi planned to make a business profitable that’s been running at a loss for its past two financial years?
That also concerns Botha. “They’re paying R9bn for a loss-making operation with the holding company having a market capitalisation of R5bn. Nowhere in the circular does it show how they arrived at the R9bn valuation of the business. They’re actually buying four mills – but there’s no valuation of the mills or information about them,