Fairfax media reported this morning that Bellamy's Australia Ltd (ASX: BAL) may take the unusual step of formally inviting retail shareholders to withdraw from the recent capital raising, following the suspension of the Camperdown Powder CNCA (Chinese export) license.
As readers will know, Bellamy's acquired Camperdown Powder with a view to securing an additional licensed source of supply for Chinese consumers. The company raised capital from investors to fund the Camperdown purchase, but the facility had its license suspended by CNCA just days after the acquisition settled.
Investors are understandably disappointed, and Fairfax media reported this morning that people who subscribed to the capital raising may be able to withdraw, with the 'shortfall' (returned) shares to be taken up by an underwriter.
If true – there has been no announcement from the company yet – this is a strong corporate governance move, as shareholders unquestionably did not get what they paid for when they subscribed for new shares in Bellamy's.
However, given that Bellamy's shares closed at $6.74 the day before the company was suspended from trade, it's also important to ask whether someone else might stand to benefit financially from underwriting the shortfall shares.
If frustrated shareholders withdraw their application for the new shares, which were issued at $4.75, Bellamy's will presumably seek to sell those shares to someone else. Therefore, that second party may be given the opportunity to buy shares at $4.75 in a company that that closed at $6.74 pre-suspension.
Fairfax posited that major shareholder and company Chairman John Ho may be one of the underwriters in this situation. This would be a net positive I think, as it would strengthen his alignment with the company and imply a determination to stick with the business, given that shares will likely fall heavily when Bellamy's resumes trade.
What's a shareholder to do?
In my view, your decision about whether to return your shares or not should hinge on whether you now feel you're over-exposed to Bellamy's, and if you think the company is undervalued at $4.75.
The Camperdown facility is just one part of the company's business, and didn't have a chance to contribute to production or earnings before it was closed down. If it didn't re-open, the company wouldn't miss anything as such, but would still be dependent on 3rd party suppliers. There would also be meaningful dilution of earnings per share of around 13%, given the 5 for 38 capital raising that took place (so each share would theoretically have lower individual value than previously).
I would be inclined to continue to hold my shares, unless the position was large enough to make me worry about my financial security, in which case I would consider selling some on market or returning shares to the company.
