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Origin shows how - Eureka Report article

Origin shows how

By Scott Francis
March 25, 2011

PORTFOLIO POINT:Origin Energy’s share issue is fair to all shareholders and should become a template for the industry.

Origin Energy’s $2.3 billion capital raising should be applauded by shareholders and become a template for the industry.

Why? Because the share issue, which is being used to pay down debt associated with the purchase of electricity assets from NSW, is being structured in a way that is fair to all shareholders.

For too long shareholders have been treated as second-class citizens. During the GFC they lost count of the number of times they were passed over by corporates who issued new shares at deep discounts to institutions and then gave retail shareholders the “left-overs”.

This was frustrating on two levels. First, retail investors who couldn’t access capital or chose not to invest for other reasons were diluted without compensation. Second, those same shareholders were often scaled back considerably and often received allocations of as little as $5000 or $15,000.

Origin has solved both of these problems with what it calls the first “pro rata accelerated institutional tradeable retail entitlement offer” or PAITREO, a one-for-five issue at $13 a share or a 19% discount to yesterday’s closing price.

As the name implies, the issue contains a fully tradeable retail entitlement, which means investors who choose not to take up the offer will be able to benefit. The entitlements come in the form of rights that will be listed on the ASX under the code ORGR until April 6.

Separately, the offer is pro rata, which means it doesn’t matter if you hold 1000 or 100,000 shares – your entitlement will be directly linked to your holding. A vast improvement on the raisings of old.

So, what should you do?

Investors who want to increase their exposure to Origin have until April 13 to apply for the shares by completing the form in the offer document and sending off a cheque. The offer price of $13 represents an attractive discount of almost 20% to yesterday’s close, a relative bargain for anyone who believes that Origin’s share price will be materially higher in the future.

Investors who choose not to increase their exposure have two options. Do nothing or sell the rights on market.

If you hold 1000 shares and you don’t want your entitlement of 200 shares then you are looking at a windfall of about $500. At this level you might consider the $20–30 in brokerage fees an impost you can do without. These investors can sit on their hands and wait for their rights to be sold into the book-build at the end of the offer period and receive the market price for their rights in the form of a cheque in the mail.

On the other hand, the investor with 100,000 shares may consider the timing of the sale to be more important. With the number of global risks hanging over our collective heads, it’s possible they take the view that Origin shares are due for a dive and therefore the 20,000 rights they have been issued are worth more today than they will be in the future. These investors can sell their entitlement on market. At their current price of $2.50 the $50,000 windfall is likely to outweigh any concerns about brokerage fees.

Should the investor have a more bullish view on Origin shares but choose not to participate for other reasons (cash flow, asset allocation, etc) they can choose to wait right up until the final trading date of April 6 before selling them into the market. This may not be such a bad idea given that rights first began changing hands for $1.15 and closed yesterday at $2.50.

Finally, a strategy that should not be ignored is to use a combination of all three, that is: buy some more shares, sell some options now and leave some to be sold into the retail bookbuild.

The key point here to note is that whatever strategy investors choose, they are being treated far more equitably than they were during the GFC, where the needs of institutional shareholders were given priority at the expense of the retail shareholder base.

It might be asked why can't this structure be the template from which all capital raisings are built on and mandated by regulators if need be? The distinction between institutions and retail shareholders has frustrated me and others for a long time – shareholders should not be afforded special rights simply because they are “institutions”.

Perhaps the best part of the PAITREO method is the flexibility it offers investors like you and me.

For those wanting to increase their Origin exposure, buying extra shares at $13 makes sense. Those happy to “take the cash” can simply sell their options now, or take a risk and see if the Origin share price rises over the next month. Either way, they should probably be appreciative of the opportunity to participate in an ethically structured capital raising – by a company that not only treats retail and institutional investors equally but also gives them upfront liquidity.