Medical products company Nanosonics Ltd (ASX: NAN) has stunned retailer shareholders with some of its recent decisions in raising $28 million in capital.
We've always argued that companies raising capital via institutional placements are treating their retail and smaller shareholders unfairly and that the most equitable form of raising capital is via a pro-rata renounceable rights issue. It means existing shareholders get the chance to kick in some extra cash to buy shares and maintain their relative shareholding, or be compensated should they decide to sell their rights and see their shareholding diluted.
We especially hate to see new investors invited onto the register and receiving shares at a discount. Who knows how long they will hang around and hold their shares for – while loyal existing shareholders receive a token offering in the form of a Share Purchase Plan (SPP).
And Nanosonics score the prize for worst capital raising this year not only for the $25 million institutional placement, but shareholders subscribing through the SPP will be allocated shares on a "first come, first serve" basis if the company receives more than $3 million in applications.
That's not exactly fair to all shareholders, but even worse is that applicants will have to pay their subscription amount up front, but won't even know if they will receive any shares until after April 8. If shareholders want to "get in first", that means paying up as soon as they receive the documentation, which will be posted to members on March 13. A worst case scenario could see shareholders potentially tieing up their capital for weeks and not receiving any shares at the end of it.
A fairer way would be to scale back each application based on the current shareholder's existing holding and number of shares applied for, or even accept all applications by existing shareholders up to a certain amount.
Clearly the board of Nanosonics has received some bad advice in relation to the structure of the capital raising. I often point out Corporate Travel Management Ltd (ASX: CTD) as the gold standard when it comes to raising capital. Another company in my good books is Capitol Health Limited (ASX: CAJ), which recently raised capital through a Share Purchase Plan alone – giving its existing shareholders a chance to buy more shares at a discount – it was clearly popular, with applications heavily scaled back.
Nanosonics' board could learn a thing or two from both companies.
