Is IAG ripping off its shareholders?

Massive share placement dilutes smaller shareholders

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published December 16, 2013 11:37 am AEDT

Small shareholders in Insurance Australia Group (ASX: IAG) are getting a raw deal from their company, as the company raises $1.2 billion from institutional and 'sophisticated' investors.

Around 754,000 shareholders hold less than 5,000 shares in the company, but more than a third (33.6%) of the shares issued, according to the company's latest annual report. Despite that fact, just $200 million worth of shares will be offered to smaller shareholders under a share purchase plan (SPP), one-sixth of what is being offered to large shareholders.

IAG is raising capital to fund the $1.845 billion acquisition of Wesfarmers' (ASX: WES) insurance underwriting businesses, which includes a ten-year distribution agreement with supermarket operator Coles –owned by Wesfarmers.

Given the acquisition is expected to be completed in March to June 2014, there seems no reason why IAG could not have conducted a pro-rata, renounceable rights issue to existing shareholders. Instead, shares are being handed out to the big end of town, diluting existing retail shareholders, especially those that chose not to or are unable to participate in the SPP. Additionally, retail shareholders will be limited to taking up a maximum of $15,000 worth of shares each, or roughly between 2,700 and 2,800 shares. At least shares in the SPP are being offered at a 2% discount to the $5.47 placement price, which itself is a 4% discount to Friday's closing price.

What is even more galling is that IAG has even refused to use the ASXBookBuild facility Broker UBS is handling the placement, and its favoured clients are likely to be offered the lion's share, whether or not they are existing IAG shareholders.

Time and again we see listed companies, including Ansell (ASX: ANN) and Retail Food Group (ASX: RFG), eschew the option of a renounceable rights issue, in favour of a placement, which is unfair to smaller shareholders. In IAG's case, a placement is even more unfair to smaller shareholders, given their substantial combined shareholding in the company.

Foolish takeaway

Shareholders could of course, vote with their feet and sell up to invest in more shareholder-friendly companies, but that's an extreme move. The best solution would be for the ASX (ASX: ASX), owner of the Stock Exchange and the Australian Securities and Investment Commission (ASIC) to change the rules, making raising capital raisings fairer for all shareholders.

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