In last year's annual report The Trust Company's CEO John Atkin set out the company's strategy as 'leading change through inspiring trust'. They aren't doing much of a job of it.
A bit of background for those who haven’t been following Real Estate Capital Partners USA Property Trust. RCU is a stock we’ve owned in the fund for the past 15 months or so. We own 8%, Acorn Capital owns 12%, Regal Funds Management owns 7% and a private investor named Greg Woolley has accumulated 19.8% over the past 12 months.
The trust’s responsible entity is The Trust Company, a listed company in the business of providing responsible entity services (effectively performing the role of a board for managed investment schemes). Along with RCU's results, released (again) a day late, The Trust Company announced that it had entered into an underwriting agreement with Woolley whereby the trust would raise $20m in a 0.98-for-1 rights issue.
It’s quite clear they need more money. An important lease extension at its main asset requires US$7m of tenant improvements and incentives, and US$88m of debt is due to be refinanced in August. As at 31 December, they had $919k in the bank.
But a rights issue 100% underwritten by the company’s major shareholder? It’s a classic Prisoners' Dilemma that ensures no one but Woolley is going to take up their rights. If we all take up our rights, then Woolley would still own less than 20%. But if I take up mine and you don’t take up yours, I’ll be left in a vehicle that Woolley controls. Given the $2.3m of fees he has negotiated for himself out of this deal, I’m not too sure that’s going to work out well.
So I don’t take up mine. Neither does anyone else, because they all reach the same conclusion as me, and Woolley ends up stealing the vehicle at a 61% discount to the post-capital-raising NTA.
It’s a joke. But we do have a plan. Over the weekend we put together a consortium of new and existing institutional investors and put an alternative proposal to the board that would raise the $20m required. Under our proposal, no single shareholder can end up with more than 20% and minority investors would have much more confidence that their interests would be protected.
Today John Atkin, chairman of the RCU's responsible entity and CEO of The Trust Company, came back to us and told us 'understands our concerns' but doesn’t think he can unwind the agreement in place. That’s unfortunate. But it was somewhat expected and not the end of the road.
We (the three large non-Woolley shareholders) are in the process of making a submission to the Takeovers Panel. We think we’re standing on solid ground. Guidance note 17, which relates specifically to rights issues, states:
In considering whether a rights issue gives rise to unacceptable circumstances [which would allow them to amend or replace the underwriting agreement] the Panel looks at the effect of the rights issue against the principles in s602. In doing so, it considers the following factors:
a. the company's situation
- what methods of raising funds are available to the company
- whether the company has explored other capital-raising alternatives
- the financial situation and solvency of the company, including the reasons for raising the funds. How much the company needs funds may influence what is reasonable for it to accept as a potential control effect
- market factors leading up to the rights issue and those reasonably likely to occur during the rights issue. Market factors have a significant bearing on the structure of a rights issue (below)
- whether the company received, and followed, advice from financial advisers
b. the structure of the rights issue
- size, price, discount to market, timing, underwriting and renounceability
- whether the rights issue is underwritten by professional underwriters or sub-underwriters or a related party or major shareholder
- whether there is a dispersion strategy
c. the effect of the rights issue
- any effect on control or the acquisition of a substantial interest
- the purposes of Chapter 6 as set out in s602
- the steps the board has taken to minimise potential control effects
- disclosure of potential control effects
- the response, or likely response, of the shareholders (and particularly any substantial shareholders) to the rights issue.
A lot of those bullet points are directly relevant here. The Trust Company didn’t once contact me to canvass the current capital raising. Last Wednesday was the first I had heard of it, and I’m fairly sure the other major shareholders would say the same.
These guidelines suggest to me that we have a clear cut case. For now I’ll leave it up to the lawyers but it's going to be an interesting week ahead.
Note: Given the large number of comments on last week's post, there are plenty of frustrated RCU unitholders out there. Unfortunately, we can't work together on anything. We are already substantial and can't act in concert with any other shareholder without risking becoming related parties. Hopefully what we're doing will be to your liking, but you'll have to make your own decisions as the process unfolds.
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