Misle d? SRP says no

Finweek English Edition - - Cover Cover - MOST WERE MI­NOR­ITY SHAR EHOLDERS

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.

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