Humour me and play along…
Let's imagine you're a part-owner of a local pizza shop. You're a silent partner and have little say in running it.
The business is profitable and growing strongly after recovering from a recent regulatory change banning it from charging fees on small orders, a big part of your shop's revenues.
But then one day, out of nowhere, the shop manager sends a letter to all shareholders which reads: "We're planning to buy out our landlords. We're fed up with having to pay them a percentage of every pizza we sell. "
You agree with him and think to yourself: "Well that makes sense. It might reduce this year's profit but we'll benefit in the long run."
So far, so good.
Then you read on… "In order to pay for it we're going to issue 47.4 million shares – equal to around 11% of the company's total – at a 9% discount to the current market value of your shares!"
But, wait for it, the best part is: "You're not included!"
"That's terrible!" You scream, as you race off in your car to see the manager.
However when you confront him, he tells you it's perfectly legal and there's not much you can do about it.
And he'd be right…
Taking money out of your right pocket…
Around midday today, pawn broker and payday loans provider Cash Converters International Ltd (ASX: CCV) emerged from a week-long trading halt.
The good news from Cash Converters' announcement today was the decision to terminate an open-ended licence with two "Development Agents", named Cliffview Pty Ltd and Kentsleigh Pty Ltd.
The licence with the two development agents has been in place for 10 years and allows them to receive a commission for every loan the company writes. Over the years, Cashies' loan book has grown exponentially.
By terminating the licence, the company will save approximately $5.7 million per year.
However the cost of termination is $30.8 million and will have an after tax impact of negative $18.8 million (including GST savings and the reduction in expenses).
Putting it in your left pocket
The bad news from today's announcement is Cash Converters chose to do an institutional capital raising of $45 million through the placement of 47.4 million shares at $0.95 each.
At June 30 2014 Cash Converters had around 428.9 million diluted shares on issue and a market price of $1.04 prior to the placement. That means total shares on issue will increase by 11%, at a 9% discount.
Now, I'm well aware it costs less in time and money to issue the shares to institutions and sophisticated investors, rather than to retail holders.
But is it fair? Did the deal have to be done so quickly?
After all, only $30.8 million of the total $45 million is going towards the licence termination, the rest will be working capital and funds for acquisitions.
So couldn't the remaining portion have included a retail offer?
According to its latest Annual Report, Cash Converters had 7,729 shareholders. At the time of writing, Cash Converters shares are down 3.4%.
Foolish takeaway
I'm a big fan of Cash Converters as an investment (if you didn't already guess it, I'm a shareholder) but today's decision is yet another case of retail shareholders getting scorned. Conducting a pro-rata renounceable rights issue is both a shareholder friendly and better way to raise money in my opinion.
In summary, today's announcement demonstrates a great use of funds but unfair way to go about raising capital.
