Warrants saga!

The parent and the largest shareholder of Environmental Resources Investment PLC (ERI) Lionhart Investment has not taken its full entitlement of its 2011 warrants, the latest Stock Market data that was out with the conversion and lodging of the said warrants in the Colombo Stock Exchange showed.

According to the Stock Exchange website, 349.367 million ERI shares were in issue as per yesterday while the Stock Market Daily on January 9, 2011 showed 315.482 million ERI shares in issue. This clearly showed that the number of new shares created was 33.885 million.

The company also in a Stock Exchange disclosure said that the number of warrants converted to shares and listed was 33, 885, 089.

However according to June 2011 ERI financials, there were 104.316 million warrants in issue, with Lionhard Investments owning 94.19 percent or 98.253 million of the issued warrants.

“The exercise date for conversion of 2011 warrants ( 104,316,480 warrants) was extended to 7th July 2011 and 21st December 2011 from the original date of 03rd June 2011 through the resolution passed by share holders at the EGM held on 16th June 2011,” a note attached to the June 2011 interim financial noted.

As per data available, 2,532,590 warrants were exercised on July 7, 2011, and the company raised Rs. 60,782,160. As agreed during the Extraordinary General Meeting, an option was given to the warrant holders who have not yet exercised, to exercise on 21st December 2011.

Thus going with the latest disclosure by the ERI and the research data, the number of warrants subscribed to by Lionhart Investments is approximately 36 million while its full entitlement remains at 98.2 million.

According to analysts, the non-acceptance of warrants by Lionhart can be interpreted in two major scenarios; either Lionhart doesn’t have sufficient funds to convert the warrants to shares or they are looking at better investment opportunities elsewhere. The analysts Mirror Business talked to almost unanimously put off the idea that Lionhart is cash strapped. “It is highly unlikely as Lionhart is a major global fund. Besides, the ERI has about Rs.8.5 billion in equity as at September 30, and after the 2011 warrants, it would be around Rs.11 billion,” an analyst said. Thus, the analysts seemed to side more with the idea that Lionhart is probably is in an exit mode, probably to find better investment opportunities elsewhere. This opinion can be considered reasonable to some extent when one looks at the dilution of shareholding of the Lionhart Investments in ERI during the past couple of years.

As at September 2009, Lionhart had 93.7 percent in ERI. But with the 2010 warrant conversion, Lionhart has trimmed its shareholding in the company to 84.7 percent. As at September 30, 2011, Lionhart has further trimmed its holding to just above 83 percent. According to the earlier statements made by the ERI, the main objective of the warrants was to source the funds of Lionhart Investment to Sri Lanka. It was said that Lion Heart Investment had planned major investments in the country, and ERI was used as an investment vehicle to bring down the cash. In line with this, ERI invested in several companies, which it termed ‘sick companies’, such as Dankotuwa Porcelain PLC and Ceylon Leather Products PLC. However when the 2011 and 2012 warrants reached the expiry date, the company decided to extend the expiry dates without exercising the warrants, citing negative market conditions and company interests as reasons.

As analysts pointed out the decisions to extend the date by the parent Lionhart and subsequently the company contradict with their initial objective to bring down money for investments and benefit from the emerging opportunities in the country.

A warrant is a financial instrument issued with a fixed exercise price at which it will be converted to shares with a future expiry date. In practice, warrants are issued to raise finance and support the growth plans and/or satisfy operational cash needs of a given company. This is linked to the main strategic plan of the organization. In the meantime, investors were seen punishing ERI shares and warrants yesterday as the share ended the day being among the top five losers. The ERI share which had already come down, fell further to close at Rs.27.50, down Rs.2.40 while its W0002 warrants fell 10 cents to end at Rs.13.90. The W0006 warrants fell 10 cents to close at Rs.14.20, and W0003 warrants fell 80 cents to close at Rs.13.60.