Monday, October 24, 2011

Diary: ng., gfs, special situations, , value investing, rights issue

Today I'd like to look at rights issues, and see if I can learn anything from them. First off, let's look, with perfect hindsight, as to what happened with NG.. Investopedia has an article explaining rights issues.

NG.: National Grid - multiutilities - 635.90p/£22.6bn
NG. is a big blue chip international electricity and gas company. I'm going to present something of a chronology of events below.

31-Dec-2009 NG. trading at 679p

14-May-2010 (a Friday). NG. at 618p.

17-May-2011 An RNS declares that it has 2.617m shares in issue, of which 0.141m are in treasury, leaving a balance of 2.476m shares with voting rights.

20-May-2010 (a Sunday) Announces a fully underwritten 2 for 5 Rights Issue to raise approximately £3.2 billion, net of expenses, through the issue of 990,439,017 New Shares at a price of 335 pence each. This implies that there were 2.476m (= 5/2 * 0.9944) shares in issue prior to the rights issue - although that figure disagrees with what's on Sharelock Holmes - which is pretty confusing. I'll use a value of 2.476. Assuming full take-up of offer, this implies a share price of (618*2.476+335*0.990)/(2.476+0.990)=537p

04-Jun-2010  (Friday) Shares bottom out at 487.60p on massive volume. This implies a discount of 9.3% (=1-487.6/537) of "fair" value (assuming that the 537p is "fair").

14-Jun-2010 (Monday) Announces result to rights issue: 94.2% take up of new shares, exact amount 932,648,512 issued. "The Board of National Grid believes the proceeds from the rights issue will allow the Group to fund a significant increase in UK capital investment and continue to deliver attractive returns to shareholders, whilst maintaining single A credit ratings for our UK operating companies in a more volatile economic environment." According to my sums, this should imply a value for ths shares of (618*2.476+ 335*0.933)/(2.476+0.933) = 541p

18-Jun-2010 (Friday) The shares trade at 516.50p, implying a discount of 4.5% (1- 516.5/541).

21-Oct-2011 Shares trade at 630p, having risen 27% since 18-Jun-2010. FTSE has only risen 5.7% during the same period. It was this kind of initial observation that got me excited about the possibilities of rights issues. However, looking at the charts further, it seemed that there was a close correspondence with the Footsie, and were neck-and-neck until about late Feb 2011, whereupon the shares outperformed the indices significantly. There was high volume of trading on 25-Feb-2011, although I don't see any real news.

So all-in-all, a disappointment. It was not the rights issue that created an exceptional opportunity (it looked only a 10% discount to fair value, which is debatable, and more like a blip than anything else). It's what happened after 25-Feb-2011 that created the outperformance. Oh well, at least I looked. Looking at some other rights issues might be advantageous, but it seems that for these larger-cap type shares, there wasn't much in the way of an inefficiency to be exploited. A 10% "maybe" isn't that interesting.

GFS: G4F - Support Services - 242.3p/£3.4bn
All of the NG. analysis was a prelude to looking at GFS. What it does:
which along with its subsidiaries is engaged in the provision of secure solutions including manned security services, care and justice services and security systems, and cash solutions, including the management and transportation of cash and valuables, as well as undertaking of other outsourced business processes in sectors where security and safety risks are considered a strategic threat.
I seem to recall that in the 80's (??) that it was involved in the transport of prisoners, and some of theme escaped. Way to go! On 17-Oct-2011 it announced:
Acquisition of ISS A/S for £5.2bn and £2bn rights issue. ... The Acquisition has a compelling strategic and financial rationale
yada yada yada.  On the day of the announcement, the share price dropped  from 283p on  Fri 14-Oct-2011 to 222p at close on Mon 17-Oct-2011, i.e. down 21.6%. The market, she no likey.  It has since recovered to 243p. It is a 7 for 6 rights issue at 122p, and they aim to raise £2bn. So a "fair" price for GFS might be (122*7+283*6)/(7+6) = 196p, although that does ignore any value from the acquired business. I'll keep an eye on this one, but I don't have any enthusiasm.

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