Ann: Acquisition of Primus and launch of Entitlem, page-3

re: Ann: Acquisition of Primus and launch of ... Just been looking at acquisition price of Primus and although not cheap compared to some of their previous acquisitions on a multiple of 4.8 EBITDA the fibre and data assets offer massive upside and while debt levels will increase substantially should be paid down quickly from cash flow.
Puts M2 in the big league.


From todays Australian.

IT'S refreshing to see M2 Telecommunications and its adviser Goldman Sachs resort to the traditional rights issue to help fund its $192 million acquisition of Primus Telecom.
M2 isn't calling it a rights issue, instead referring to it as a renounceable entitlement offer, but it's still an old-fashioned pro rata rights issue by any other name, under which shareholders can either take up their entitlements (rights) or sell them on the ASX.

In fact, rights trading in M2 is set to start today and will run until May 4.

Renounceable rights issues have long been regarded as the most equitable form of capital raising for all of the shareholders, and they used to be the traditional form of capital raising from shareholders.

That said, companies have long been able to raise some capital via non-pro rata share placements. But because they are dilutive, the ASX requires shareholder approval for the issue of more than 15 per cent of the existing capital.

...In recent years, accelerated raisings, in which the institutional placement is sold to the institutional shareholders ahead of the retail component and any shortfall is sold by way of a bookbuild, any proceeds above the issue price are distributed to those holders who did not take up their entitlements.

There are now a variety of accelerated raising structures, with AREOs (accelerated renounceable entitlement offers), ANREOs (accelerated non-renounceable entitlement offerings) SAREOs (simultaneous accelerated entitlement offers) and, more recently, PAITREOs (pro-rata accelerated institutional, tradeable retail entitlement offer), which are as least as equitable, if not more so, than traditional renounceable rights issues.

ANREOs are a particularly distasteful form of dilutionary capital raising that flourished in the wake of the GFC, often accompanied by large share placements to institutions, which heightened the dilution, predominantly to retail shareholders, and resulted in massive transfers from the retail holders to the underwriters or sub-underwriters.

The justification given was the need to repair debt-ravaged balance sheets, but institutional investors gorged on cheap issues, the investment banks waxed fat on the underwriting fees and retail investors got the short end of the stick.

ANREOs had largely disappeared from the scene until revived by Bank of Queensland, which late last month announced a highly dilutionary and inequitable $450m equity raising, comprising a $150m share placement to institutional investors and a $300m accelerated pro rata non-renounceable entitlement offering.

Rubbing salt into the wounds, BoQ declared an interim dividend of 26c a share and made it payable on the shares issued in the placement.

The BoQ offer structure touched off a debate about the need for companies seeking capital to balance the equitable interests of existing shareholders, which even attracted the attention of ASIC.

M2 and Goldman Sachs, its corporate adviser and underwriter, was conscious of the need to look after the interests of all shareholders.

It would have been possible to have used an AREO, or PAITREO structure, but M2 at present does not have a large institutional ownership. At the same time, the company knew of interest by several institutions in becoming shareholders.

M2 could have satisfied that demand through a share placement, which would have enabled an issue price at a smaller discount than a rights issue. However, a renounceable rights issue was the more equitable method. The rights trading should provide a natural market clearing mechanism, enabling institutions that are interested in joining the share register to buy the rights and then subscribe to the issue.

M2 is now marketing the benefits of the accretive Primus acquisition and is confident that it will create institutional interest in the company.

The issue is on the basis of one new share for each four held, at an issue price of $2.66 a share, a discount of 23.8 per cent to the previous share price of $3.49 and a 20 per cent discount to the TERP (theoretical ex rights price) of $3.32.

The issue has been pitched at such a discount there is value in the rights. The amount of the discount is not an issue because shareholders who renounce their entitlements can obtain value through trading their rights.

When announced, the rights had a theoretical value of 58c.

Investors initially reacted by pushing M2's share price down to $3.33, in line with TERP, which suggested that M2 and Goldman Sachs had got it right.

The share price softened slightly yesterday, ahead of rights trading, dropping 8c, or almost 2.5 per cent, to $3.25. At that price the rights have a theoretical value of 47c