Share growth dilution when company sells percentage stake?

[Johndp2017]

Hello everyone!

I am not sure if this is the correct forum to post in but I am after some urgent information regarding the potential dilution of the potential growth of shares which I have in a company due to its announcement that it plans to sell a 40% stake to foreign investors.

OVERVIEW:

I own 14,000 dollars worth of shares in a company which makes it money by selling seafood from aquacultural sources. I bought my shares at 7.1c per share, and the company has a market capital of 90 million dollars with a total of 1,350,000,000 shares meaning that the market value per share is 6.7c. The company is now massively expanding by building new facilities and has calculated that once their new facilities have been built that their market capital will go up to 1.45 billion ( up from 90 million.) This represents a markep capital ( and ) share price increase of 16 fold.

Recently however, I read an article where the owner of the company said that they plan on selling 40% of the company to investors while still retaining a 60% stake in it for themselves and use the money to fund the remainder of the expansion project.

So I did some research on what happens to the shares of a company when a part of the company is sold, and what I learned was that when a percentage of a company is sold ( in this case 40% ) that what actually happens is that the company creates and issues an additional ( in this case 80% more shares ) such that the original owner still has the exact amount of shares he originally had, but the value of that 40% sale is then added to the market capital of the company. ( In this case the company has 1.35 billion shares so selling 40% of the company means creating an additional 80% of shares which means that the company will then have a total of 2.43 billion shares and a total market capital of 162,000,000 which is up from 90,000,000.) The fact that the purchase value of the 40% stake in the company is then added to the market capital of the company means that the newly issued shares would NOT dilute the existing share values of existing share holders.

THE PART I NEED URGENT HELP WITH:

But what does this mean for the share growth potential? Does this mean that the projected growth of the shares have been diluted by 40% as well ?

For instance in this scenario, in regards to the predicted 16 fold return ( as stated at the beginning of the post, ) doesn't it mean that because the company's market capital has now been raised to 162,000,000 (up 80%) while my share prices are still the same at 7.1c that my sgare growth potential has now been diluted by 40% ? Since the current market capital will now be 162,000,000, to determine the new growth potential simply divide the projected market capital by the existing market capital 1.45 billion / 162 million = 8.78 fold ( down from 16 as mentioned at the beginning.)

Am I right to have made this assumption ? Please only answer if you know, alternately feel free to ask for more information if you need any.

Sincetely,
John

 

[ROE]

Private or public company? if it is a public company give us the code and we can read the announcement and maybe able to help, if it is a private company it tough cos we don't know the makeup of the companies and its financial information.

Seem a little strange for a company to grow 16 folds by just building some new facilities
who value it? case of a too hard of a basket for a private company for us to comment.

 

[Knobby22]

Hello everyone!

Recently however, I read an article where the owner of the company said that they plan on selling 40% of the company to investors while still retaining a 60% stake in it for themselves and use the money to fund the remainder of the expansion project.

But what does this mean for the share growth potential? Does this mean that the projected growth of the shares have been diluted by 40% as well ?

John

Think of it this way.
Your shareholding has been diluted. If it was 100% of the existing shares being issues to someone else you would be diluted by 50% (you would own half of what you use to own of the company) but in this case it is 80% so you have been diluted by 40% (so you own only 60% of what you used to own of the company). You therefore get proportionally less of the profits e.g. dividends. If the growth remains the same as forecast you will get that growth but on a smaller proportion of the shareholding.

The money should be used to reduce debt and buy more assets so that the growth increases make it worthwhile owning less of the company. You just have to pray that the CEO knows what he is doing.

 

[skc]

Am I right to have made this assumption ? Please only answer if you know, alternately feel free to ask for more information if you need any.

Sincetely,
John

John, just think of all of this on a per share basis. If the company will have a value of $1.45B at the end of all this (a big if, more on this below), simply divide the number of shares in existence at the time (2.43B shares) will equate to a price of 59.7c per share. Given current share price of 6.7c it will be an 8.91x increase... so close enough to your own calculations.

If the company can fund the expansion project by itself, then it seems unnecessary to issue additional shares to new investors at this time, given the imminent uplift in the value of the company. However, if the company needs funds to pursue the expansions then the new investors are necessary to increasing the company's value... so strickly speaking they are not diluting your growth, rather they are enabling the growth.

Having said that, I am guessing this is an unlisted company? I have never seen a listed company offer a projection of market cap with a straight face, much less actually have it turn into reality. The reason is simply that no one can forecast the future as such. Just be weary of putting too much faith in what management of a company might say.

 

[craft]

Sounds like seafarms group (SFG)

If so they have very little internal cash flow to fund the expansion. They are going to have to sell a significant portion of the company to fund the project. I don't see current holders as in any stronger position then potential funders, so little share price uplift to existing holders from the project - certainly not the multiples referenced. Potentially some re-rating if/as project moves through potential to realisation, but that to will be shared with the new shares issued.

Could be a decent project and eventually decent business but there's a long road and a lot of unfunded capital required. Could become a billion dollar company but still have a share price sub 10c until they start generating and reinvesting cash flow.

 

[skc]

Sounds like seafarms group (SFG)

If so they have very little internal cash flow to fund the expansion. They are going to have to sell a significant portion of the company to fund the project. I don't see current holders as in any stronger position then potential funders, so little share price uplift to existing holders from the project - certainly not the multiples referenced. Potentially some re-rating if/as project moves through potential to realisation, but that to will be shared with the new shares issued.

Could be a decent project and eventually decent business but there's a long road and a lot of unfunded capital required. Could become a billion dollar company but still have a share price sub 10c until they start generating and reinvesting cash flow.

Did you find where they said the project will make the company worth $1.45B?

 

[craft]

I've

Did you find where they said the project will make the company worth $1.45B?

I've seen it described in the media as a 1.45B (amongst other figures ranging from 1-2B) project. Doubt the company ever said explicitly that it would create a 1.45B market cap. But I have't followed closely enough to say it wasn't said. I suspect though its more likely an interpretation by our poster, rather than a company statement.

Google project sea dragon for more info on the project if interested.

 

[skc]

I've


I've seen it described in the media as a 1.45B (amongst other figures ranging from 1-2B) project. Doubt the company ever said explicitly that it would create a 1.45B market cap. But I have't followed closely enough to say it wasn't said. I suspect though its more likely an interpretation by our poster, rather than a company statement.

Google project sea dragon for more info on the project if interested.

I see. Thanks.

To John... best to get a sense check on that. The "$ project" can have a range of meaning... it could be construction costs, sales over the next 10 years, NPV over project lifespan, economic benefits to local communities etc etc. If you want others' view on how to interpret the figure then post the link here and you should get some responses.