The Mayne Report: Mirvac SPP, Afterpay regulatory issues, Woolies & more

Afterpay, Austrac and the suspended SPP

The Mayne Report has had plenty to say about Afterpay over the past year and it’s fair to say we’ve been one of the more sceptical commentators, criticising its governance arrangements and business model and calling for greater transparency and disclosure.

Well, hasn’t the past month been interesting?

First up, even if Afterpay goes to zero, the three key founders and executive directors (Anthony Eisen, Nicholas Molnar and David Hancock) are off risk after selling down $103.5 million worth of stock at $23 a pop last month in conjunction with a $317 million institutional placement.

I was surprised and impressed that they found credible offshore investors in Tiger Management and Woodson Capital to take the stock from the insiders as a total of $420 million worth of new institutional money piled into Afterpay.

This represented vindication for the founders even though it quickly became mired in controversy when it was announced the following day that Australia’s most feared Federal regulator, AUSTRAC, would be appointing an external auditor to review the company’s money laundering compliance.

The Afterpay business model was a bit like Uber – enter the market with all guns blazing and hope the regulators won’t put you out of business. The clear regulatory risk, in this case, was systematically allowing customers to open accounts without comprehensive identity checks.

Remarkably, since the AUSTRAC audit was announced, the company has managed to retain faith in the market, buoyed by announcements including a commitment to finding a new independent chair, securing new executive talent and promises by the founders to extend the period before they will sell any more shares.

Even suggestions by competitor Visa that it will attack Afterpay’s market segment didn’t prevent the stock closing at a staggering $26.84 on Friday, giving it a market capitalisation of $6.78 billion despite never having made a profit.

Then there is the question of the promised Afterpay Share Purchase Plan at $23 a pop for the company’s circa 30,000 retail shareholders, following on from the $37 million institutional placement.

Strangely, Afterpay announced it was deferring the SPP on June 26 and then acting chair Elana Rubin wrote to shareholders on July 4 explaining that this was because of uncertainty surrounding the AUSTRAC audit.

This only makes sense if the Afterpay share price had tanked to below the offer price, although the VWAP pricing alternative even negates that point as well.

Frankly, as an Afterpay shareholder looking at the prospect of an in-the-money SPP, I don’t buy this delay for a moment.

If the AUSTRAC investigation is so material and the uncertainty so great, why is ASX allowing the stock to trade at all?

An SPP is effectively like a free option – but it only has value when the market price is above the offer price, which is what we have at the moment with Afterpay shares closing on Friday night at $26.84.

The Afterpay board should get on with dispatching the SPP offer at $23 and be done with it. They should also lift the unnecessarily restrictive $30 million cap.

Even if AUSTRAC fines Afterpay $50 million, that is immaterial when compared with the current market capitalisation of $6.78 billion. Not even 1 per cent.

The bigger issue is whether AUSTRAC will impose crippling procedures on Afterpay, or trigger new legislation which crimps its ability to operate in the shadows of the banking system.

Bigger again, is the question of asset quality and that’s where the greatest risk lies. Can its business model of offering unsecured finance to millennials really survive the inevitable losses you would expect from bad debt write-offs to those with poor credit and a limited ability to repay?

This is the part of the Afterpay business model which I still don’t understand, but investors overall remain net believers so let’s just watch this remarkable rollercoaster ride continue and ultimately see who is right.

The AGM in Melbourne later this year should be a corker and it will be interesting to see if they’ve been able to attract some serious talent to the board as independent non-executive directors. Who would take on such a job? Who will chair the meeting?

Acting chair Elana Rubin’s 56,000 Afterpay shares are now worth around $1.5 million, but it’s noteworthy that she is not prepared, or been asked, to step up as permanent chair. Elana Rubin is also a director of Mirvac, which bring us to another interesting issue…

Mirvac investors leave millions on the table

What is wrong with retail investors in Australia? Property company Mirvac raised $750 million in a placement at $2.97 last month and then followed through with an in-the-money Share Purchase Plan at $2.90 (adjusted for a 6.3c distribution) which was capped at $75 million.

We were lucky enough to have two entitlements in our household and received a full allocation which facilitated a $3400 profit exiting at $3.26 on day one last Friday.

I did the usual lobbying to push for the cap to be lifted but was then shocked to discover that only 14 per cent of eligible shareholders chose to participate.

We only know this because Mirvac agreed to our request, first adopted by Dexus in this SPP outcome announcement, when it made this announcement last week, including the following key paragraph:

“The SPP offer was sent to 26,774 eligible Security holders and valid applications totalling $46.2 million were received from approximately 3,386 Security holders. This represents a participation rate for those eligible Security holders of 14 per cent and an average application worth $13,600.”

Why would 86 per cent of Mirvac shareholders or 23,388 individuals act irrationally and decline to buy $15,000 worth of new shares at $2.90 pop when, as this chart shows, they were trading above $3 for the duration of the offer period and closed at $3.25 on June 25, the day the offer closed?

Given there was no VWAP pricing alternative, any rational Mirvac investor would have waited until after the close of trade on the last day and then pumped the full $15,000 in through BPAY knowing that it was 12 per cent in the money and a quick $1800 paper profit was there to be had if the price held until the shares were issued two weeks later on Friday, July 5.

I exited at 10.05am on Friday at $3.26 but this was a mistake because the stock then ran up to a record high close of $3.32, giving Mirvac a market cap of $13.04 billion and a ranking of 37 in the league ladder published in The Weekend Australian.

This baffling lack of retail shareholder demand means we don’t get to add Mirvac to this long list of companies which have expanded capped SPPs after strong demand. This was the incredibly rare situation of an in-the-money capped SPP where the cap was not reached. Not even close with just $46.2 million of monies applying for $75 million worth of stock. That’s a 38.4 per cent shortfall.

Assuming that 40 per cent of Mirvac shareholders had applied for the full amount and the Mirvac directors had graciously accepted all $160.6 million worth of applications, based on Friday’s $3.32 closing price, you are talking a collective paper profit of $23.2 million.

These are serious gains not to be sneezed at, but instead, only 3,386 Mirvac shareholders have shared in $6.7 million worth of paper gains.

Something is seriously wrong here. I suspect there are many thousands of Mirvac shareholders who never even heard of the SPP offer because their portfolio is managed by some third party which is not geared up to process such applications.

The Mirvac directors really should commission some form of investigation to better understand why so few of their shareholders took up the offer.

The company presumably failed to tap into their email database to send a reminder email to investors as the offer was closing. Perhaps Mirvac needs to apply some of the marketing skills they have when it comes to selling apartments to property investors to their own investors when they are offering up discounted stock in the company?

Around the grounds of gambling news: Woolies, Macquarie and credit betting

There’s been plenty of big news in the gambling industry of late, as is explained in this month’s edition of the Gambling News email update that was published by The Alliance for Gambling Reform yesterday.

I was particularly interested in Macquarie Group’s move to ban credit card transactions with gambling companies but of more interest to investors is the proposed $10 billion pokies, pubs and liquor demerger by Woolworths.

Wearing the anti-gambling hat, I put together this media release on Thursday equating the formation of Endeavour Group to Rio Tinto’s divestment from the coal industry at a time when ethical investment and attention to ESG issues is gathering steam globally.

There has been an avalanche of media coverage, including some commentary from Alan Kohler in his InvestSMART Weekend Briefing, but one element which hasn’t been touched on is whether Woolworths will give its shareholders an opportunity to exit as part of the demerger process.

At the moment, Woolworths has about 385,000 shareholders, many of whom would rather not own shares in Australia’s biggest operator of poker machines with more than 12,000 of the devices sprinkled across 286 gaming rooms in its pubs estate.

Woolworths has more pokies than Australia’s two biggest casino companies, Crown Resorts and Star Entertainment combined, and they drain an estimated $1.5 billion from gamblers each year, although Woolworths refuses to disclose that figure.

Therefore, when the demerger document goes to Woolworths shareholders, retail investors should be given the options of ticking a box which says “please arrange the sale of my shares so I never have to own a piece of this company”.

This would expedite the usual process of actively reducing the size of a share register when a big company spins off a much smaller outfit, leaving tens of thousands of investors stuck with an unmarketable parcel.

Woolworths has been through all this before when it spun off Shopping Centres Australasia in October 2012.

Almost 7 years later the company is capitalised at $2.4 billion and has a share register comprising 64,346 shareholders, which is just 16.7 per cent the size of the current Woolworths share register.

If the Endeavour Group is spun off with a strong balance sheet, the board could initiate a buyback as part of this demerger process. And why not give shareholders the opportunity to buy more Endeavour shares from those wishing to exit?

It will be very interesting to engage with Woolworths on all of these matters over the coming months leading up to the demerger vote at the AGM in November.

Potential AGMs of interest in coming season

As is explained here, after 25 months I’ve resigned from the part-time gig with The Alliance for Gambling Reform, effective last Friday, and will be pivoting back to more journalism and shareholder activism, albeit still taking on the gambling industry where possible.

The 2019 AGM season is set to be my liveliest in several years given there will be no constraints imposed by having a regular job, serving as a local government councillor or sitting on the Australian Shareholders’ Association board.

Here is an early chronological schedule of the likely companies that will be targeted with questions, a board tilt or both, along with a summary of the key point of interest.

Commonwealth Bank: October 16. Why are they still allowing credit card purchases for gambling, unlike Macquarie, Amex and Citi?

Tabcorp: Saturday, October 19, in Sydney. Why are they taking $30 million a year from RSL Victoria to run their badly performing pokies empire? Is this a fair deal for veterans?

Star Entertainment: October 24. Threat from the proposed second casino on the Gold Coast.

Crown Resorts: October 24, Melbourne. Please explain James Packer’s $1.8 billion share sale deal with Lawrence Ho’s Melco group.

Bendigo & Adelaide Bank: October 29 in Bendigo. Why are they still allowing credit card purchases for gambling, unlike Macquarie, Amex and Citi?

Woolworths: October 30, Sydney. Exit from pokies, demerger and gambling practices.

Wisetech: November 19. Keen to put a new tech billionaire through his paces.

Westpac: December 12. Why are they still allowing credit card purchases for gambling, unlike Macquarie, Amex and Citi?

ANZ: December 17. Why are they still allowing credit card purchases for gambling, unlike Macquarie, Amex and Citi?

NAB: December 18: Why are they still allowing credit card purchases for gambling, unlike Macquarie, Amex and Citi?

I’m also intending to attend the AGMs of Afterpay Touch and ALE Property Group (the biggest landlord to Woolworths pokies pubs) this year but the dates are yet to be disclosed.

If there are any AGMs you believe need some special attention in the back half of 2019, drop us a line to stephen@maynereport.com.

PAITREOs dry up as GPT joins the placement club

It has now been 10 months since we last had a PAITREO capital raising as can be seen on this list. We really seem to be losing the battle with even conservative ASX50 property giant GPT opting for an $800 million placement at $6.07 in June.

GPT is following up with an SPP at $5.94, so just like Mirvac, it has differential pricing because of the timing of a distribution payment.

The GPT SPP is capped at $50 million but with the stock at $6.49 on Friday it should be swamped by the circa 32,000 eligible shareholders (the annual report discloses 32,614 shareholders in total) who have until July 15 to take it up.

The maximum theoretical amount that could be applied for is $480 million but if we get a repeat of the 14 per cent Mirvac participation rate, only $61 million in applications will be forthcoming from retail shareholders.

If you know anyone who is a GPT shareholder, tell them to apply for the maximum $15,000 amount and if they can’t afford it or are worried about being overexposed, tell them to immediately sell $15,000 of their existing GPT stake and then reinvest.

If the holding is too small, beg, borrow or steal the funds. If no-one will finance you, drop us an email to stephen@maynereport.com and I’ll spot you a loan.

Clearly, that last option won’t be happening but you get the drift about maximising retail shareholder participation in an SPP which is clearly in the money. Here’s hoping GPT will do a follow-up reminder email to shareholders this week.

Sadly, I won’t be participating because GPT somehow fell out of the world’s biggest small share portfolio. Must have been one of those unmarketable parcel compulsory sale forms that got lost in the paper deluge at home.

St Barbara and Deutsche Bank

Goldminer St Barbara is meant to be an ASX200 company but it came up with a dark ages capital raising in May which we called out in the last edition.

The trigger was an over-priced $854 million takeover of Canadian company Atlantic Gold Corp, which was partially funded by this $490 million 1-for-3.1 non-renounceable offer at $2.89.

The capital raising should have been a PAITREO. If it wasn’t a PAITREO, it should have at least been renounceable and if it wasn’t renounceable then at least retail investors should have been able to apply for unlimited overs.

Instead, St Barbara went with a non-renounceable that had the most restrictive overs component we’ve ever seen on the Australian market, with no minimum amount of overs and an overall cap of just 25 per cent of a shareholder’s entitlement.

I own 3 St Barbara shares and to highlight the stupidity of this, was offered 1 new share in the entitlement offer and a maximum of 1 additional share for a grand total investment $5.78.

St Barbara has about 9000 retail shareholders and they should have been treated better than this.

The $355 million institutional component of the offer finished 19 per cent short sparking a bookbuild to offload the $67 million shortfall but at a fixed price of $2.89 this meant no compensation was paid to non-participants.

Then again, the caravan has well and truly moved on from an argument about who is getting windfall gains out of St Barbara to one about who is left picking up the tab for an out-of-the-money raising.

St Barbara shares tumbled to a low of $2.50 on June 11 after releasing this profit warning. The $131 million retail component of the $490 raising only attracted miserly applications worth $4 million so Deutsche and its sub-underwriters had to come up with $127 million on the settlement date of June 11 when the market value of these shares was only $110 million.

The board kindly allowed retail investors to withdraw any applications after the profit warning and the unknown question is whether under-writer Deutsche Bank granted the same latitude to any of its sub-underwriters.

Deutsche Bank was paid $8 million to underwrite the $490 raising and would also have shared in part of the $13 million in transaction costs for the Canadian acquisition.

With the gold price surging, St Barbara shares have now recovered to $3.11, meaning the raising is no longer out of the money.

The unknown issue is how quickly Deutsche off-loaded its exposure and whether it participated in any of the upside.

I suspect not giving news reports this week that Deutsche Bank is closing much of its Australian equities business..

As for retail investors, the wash-up is that virtually the entire $490 million raising was taken up by existing or new institutional investors lined up by the underwriters and the 9000 retail shareholders have collectively been heavily diluted.

The shares were trading at $3.32 before the over-priced acquisition was announced, so value has still been destroyed, especially considering that the Australian dollar gold price has surged through $2000 for the first time.

Only time will tell if this Canadian acquisition is another offshore value killer for Australian investors, but the saga of the St Barbara capital raising won’t be forgotten for a while, especially by the folk at Deutsche Bank, many of whom are now pondering their future in the Australian market as a troubled global investment bank sprints for the exit.

That’s all for now.

Until the next edition in a fortnight, keep doin’ ya best!

Stephen Mayne.