Misle d? SRP says no
misled about the size of the discount and number of new shares to be issued when Sappi asked for support of its rights issue? Minority shareholder Theo Botha believes they were and asks how the relevant circular from Sappi got through the Securities Regulation Panel (SRP).
SRP executive director Richard Connellan has a short answer. “If you look at the circular that went out it’s clearly indicated that anybody unhappy with the proposals had time to lodge complaints. If that happened we would have investigated. It’s no good coming up with complaints after the fact.”
Quite. But in this case the facts only came out after the fact that shareholders had been asked – and a large majority had approved – the rights issue. Botha’s contention is that the only indication in the document (on page 39) of the number of shares that might be issued in the rights issue was in the pro forma adjustments. And that indicated 73m – way off the 289m new shares Sappi will be issuing.
But that’s history now. The SRP believes all was in order. And it’s their stated purpose to ensure “fairness to shareholders”.
However, Connellan did add that Sappi couldn’t be expected to reveal final details too far in advance. “In volatile markets, as we have today, for Sappi to project the price far in advance could not be expected.”
Apart from Sappi wanting to ensure shareholders came on board for the rights issue there’s possibly a second reason the price of the new shares was pitched so low. The rights offer is being fully underwritten by international merchant bankers Citigroup Global Markets and JPMorgan Securities. There’s a chance – an outside chance at best – that if a significant number of minority shareholders don’t follow their rights, the two banks could be left holding large chunks of Sappi stock. A low price for the new shares would mean they could offload the holdings quickly, which is probably what they’d do. at 9% and rising to 15%. Those are very high interest rates for Europe and will cost Sappi around R375m every six months.
Botha asks how Sappi in Europe is going to meet those interest and capital repayments and whether its other divisions in the US and SA will be subsidising the deal.
While Sappi in SA didn’t have great third quarter results – affected by lower volumes than expected, delays with the commissioning of its Saiccor expansion and fires that destroyed plantations and part of the Usutu Mill – the business is profitable. It irks some shareholders that money made at the solid business in SA is used to partly fund Sappi’s unprofitable adventures in Europe.
While following rights in the rights issue might be neutral for shareholders, despite the much lower share price Sappi will settle at, what about shareholders who don’t want to or can’t follow rights? Botha says they’ll see value significantly diluted.
But much of the support would have come from institutional shareholders, such as Allan Gray and RMB, which hold a combined 34,5% of Sappi. The Public Investment Corporation is also a shareholder and voted for the rights issue. So is the Industrial Development Corporation, which abstained.
Piet Viljoen, chairman of asset manager Regarding Capital Management, is a little circumspect. He doesn’t hold Sappi in his portfolios but has been watching the deal. He says: “Sappi is giving up a lot to get very little. I wouldn’t say it’s a fantastic acquisition for Sappi shareholders. There might be benefits, but my gut feel is I’m not that sure. Fortunately, we’re not shareholders so don’t have to make a decision.”
John Thompson, the rated commodities analyst at Investec Asset Management, says something had to give in the European paper industry. “You could sit back or get proactive. Sappi is acting: it’s a ballsy move Ralph Boëttger is making. But maybe it’s being done at a bad time.”
What should minority shareholders do? Botha says they should sell now. “Let Sappi have the rights issue, wait for the dust to settle then come back in when the price goes down to R30, probably lower.”
Minorities who do follow their rights will probably have to take a long-term view on Sappi. Though its quarterly results were reasonable there are many indications that demand for paper in Sappi’s major markets is going to slow.
On the positive side, that will be partly offset by an expected reduction in input costs and a price increase for paper that Sappi implemented in Europe a month ago, the first increase in seven years.
Perhaps Sappi should split the business into two: Sappi Southern Africa and Sappi International, essentially Europe and the US.
And investors would then have a choice. The solid, if boring, business in SA or the overseas operations and the potential, and risk, that those entail.