In the words of Kiwi rapper Scribe, ‘not many, if any’. That was the conclusion when Bristlemouth asked How Many Puffs in the Bluescope Butt? back in September.
Now Bluescope is asking for more money, announcing an underwritten 4 for 5 renounceable entitlement offer to raise $600m.
The offer price, $0.40 per share, represents a 34.4% discount to Monday’s closing price of $0.61, and a 22.5% discount to the theoretical ex-rights price, the weighted average of the pre-raising price and discounted offer price. So should shareholders kick more cash in or not?
These stressed capital raisings are interesting beasts. The transfer of money from shareholders to lenders is obviously good for the banks. Not presiding over a receivership is obviously good for the directors. But throwing good money after bad is often not the best idea for shareholders.
Take Elders as an example. CEO Malcolm Jackman has pointed out many times since that the company wouldn’t be alive if not for the $550m capital raising in October 2009. Fair enough. But shareholders would be better off if the company had died. The $550m they contributed is now worth less than $100m.
The banks are better off. They will get almost all of their money back versus perhaps 50 cents in the dollar had it been liquidated. The directors still have jobs. But the shareholders are clearly worse off, having incinerated another $450m in what was already a gigantic money pit.
Bluescope shareholders face a similar decision today. Using the 30 June balance sheet, we aren’t certain that this business is worth more than its debt (see the liquidation numbers in the previous post). And it seems to have deteriorated since.
The capital raising announcement included the alarming piece of news that net debt has increased by $500m in the past four months alone, from $1.1bn at 30 June to $1.6bn at 31 October. The $600m capital raising will only return Bluescope’s indebtedness to the level at 30 June.
Scribe was briefly arrested on the weekend, apparently for ‘dissing’ the police in one of his performances. If I owned Bluescope, I’d be doing some dissing of my own and telling the directors what they can do with their capital raising. It is far from a comprehensive solution to Bluescope’s problems. Even if it was, it might not be in shareholders’ interests.
*Note that the rights are renounceable, so if you do own them and don’t want to participate in the capital raising, you may be able to sell your rights on market.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.