Share Purchase Plans

[intheblack]

Hi all,

I'm a shareholder in ARG and MLT and like many other listed companies, they offer shareholders the opportunity to invest up to $5,000 p.a. via the SPP at a discount to market price.

My question is this: when these stocks are trading at a discount to their NTA, the SPP price is therefore less than the NTA. Does this not mean that buying shares in the SPP is disadvantageous to existing shareholders who do not take up the offer?

To explain: imagine a company with two shares outstanding, each with an NTA of $1. If they are trading at a discount such that the SPP price is $0.50, and I purchase two shares in the SPP, this means that the company's new total assets is $3, with 4 shares outstanding. Therefore I own 50% of the outstanding shares ($1.50 worth of assets), whereas the original owners' assets have been reduced from $2.00 to $1.50.

Hope to receive an explanation, because it seems like the original shareholders are being ripped off! Many thanks.

 

[apra143]

Recently posted a thread here

What do SPP's usually involve?

Why offer existing shareholders the right to buy at a cheaper price, when the company could have received more on the open market?

Do SPP's usually require the buyers to hold the stocks for a certain period of time? I believe my brother cannot sell his company stocks (as part of employee share purchase plan) for a year or so.

Bottom line ... is it worth entering into SPP's?

 

[noirua]

If a company offers a share purchase plan with reinvesting dividends, they are definitely short of cash. There could be a good reason if it's being used for development or purchasing an asset, (SBM and CSR recently, despite the companies doing an about turn from a year or two ago).

Beware companies that are trying to raise cash for exploration, if you'r risk adverse, otherwise it's more money into the gamble.

If a company is raising cash from shareholders because loans for their risky outfit are very expensive, then only invest in the share plan with care and full knowledge of the downside.

If a company is also placing shares at the start or during the share plan, do a lot of research before investing. Quite often the shares tumble, Nb UXA recently.

 

[Tysonboss1]

Dividend re-investment plans are great if you are a buy and hold investor,...

the reason that the shares are at a discount to market rate is to,

1, atract you to join the dividend reinvestment plan...

2, because you are actually saving them money,..... by letting them keep the dividend check to finance further growth you are saving them having to take out loans which they may have to pay high interest on, after alll the discount is probally about 2.5% of the market rate,.... but they would probally be paying 9% on the company loan book.

remember they are not buying shares and passing them on to you at a discount,... they are actually writing new shares

 

[Doogee]

It's just a way of raising additional capital. As Tysonboss1 said, they are issuing new shares. They can do this through a general public offer, but they must give first preference to existing shareholders. Often the company can raise the capital it needs from existing holders only, and in this case they will issue a share purchase plan.

The reason they do this is obviously it's a lot quicker to raise capital when the price is below market rate. Although they're issuing the shares at a cheaper price, the offers are often taken up almost in full in a matter of a month or two, providing instant financing for whatever the company wants to do.

 

[So_Cynical]

1 of my holdings has an "annual" Share Purchase Plan
which i think is mega dodgy....i really respect company's that
value there shares by not issuing them Willy nilly.

 

[apra143]

1 of my holdings has an "annual" Share Purchase Plan
which i think is mega dodgy....i really respect company's that
value there shares by not issuing them Willy nilly.

Are there limits placed on when you can sell the shares (from those bought through the share purchase plan)?

For some reason CDD is limiting existing shareholders to $5000 worth of shares @ 7.00

Plus they announced some major institutional backing, which has got the price going.

 

[Doogee]

Are there limits placed on when you can sell the shares (from those bought through the share purchase plan)?

For some reason CDD is limiting existing shareholders to $5000 worth of shares @ 7.00\

ASIC policy dictates that $5000 is the maximum across like holdings (ie., same name and address) with some exceptions. Make sure you read the SPP documentation, but in general, shares purchased under an SPP will rank equally with existing shares, meaning you can sell them after they are allotted.

 

[Judd]

As far as I understand the situation companies may raise additional capital in various way:

a rights issue, say, the right to purchase 1 new share for every 4 you currently hold. These right may be renouncable where you can sell the right on the market or non-renouncable in which case you cannot sell the right and if you don't take it up you get zilch. Both of these require a prospectus to be prepared at some cost.

a placement with "sophisticated" investors, ie those with a s%^t load of money, or institutions. Can be done very quickly and does not require a prospectus to be prepared. Companies like it as it is quick and clean but it dilutes the holdings of the mug punter, ie me and others like me.

Share Purchase Plans. Company law allows companies to offer to existing shareholders the ability to purchase up to $5000 worth of its shares each calendar year, generally at a discount to market price based on volume weighted average price over 5 trading days. This is non-renouncable, ie if you don't want additional shares, you cannot flog the right off to somebody else and your holding is effectively diluted. No prospectus is required and is generally a fair way of raising additional capital. There were rumors of increasing the amount to $10,000.

I know that the listed investment company Argo (ASX Code: ARG) presently offers a SPP of $2,500 to its shareholders every 6 months around dividend time. Milton (MLT) offers one of $5000 in September each year and Choiseul (CHO) offers one in March. They then invest the funds in other companies. Enable long term holders to gradually build a stake so they are not sutiable for everyone. Sometimes, just in case not all shareholders take up all of the SPP, these companies, in particular ARG, allow existing shareholders to apply for these extra shares. In effect, shareholders underwrite the SPP.

As for the Employee Share Purchase Plan you refer to, generally they are offered to employees as an incentive to commit to the company. They may have various constraints, such as not being able to be sold for a period, the company may offer loans, with or without interest, to enable the employee to purchase the shares. Obviously if a loan is offered, you can bet that the company has made sure it is tax deductible.

 

[Tysonboss1]

1 of my holdings has an "annual" Share Purchase Plan
which i think is mega dodgy....i really respect company's that
value there shares by not issuing them Willy nilly.

Well it's not really a bad idea if they are making good use of the money,... after all if they borrowed the money they would be paying interest which would slow the growth.

they may have some great growth plans that need extra capital, or they may be using the funds to lower debt and decrease the companies debt risk,..

When mcdonalds was growing in the early years the owner Ray Kroc was actually giving away equity in the company to anyone that would lend him money,

At one stage when mcdonalds only had about 1000 stores no bank would lend him money,... he finally borrowed money from a new york insurance company at over 10% interest to be repaid in full,... as well as giving them 25% ownership of the company as a bonus just for agreeing to lend them the money,... Ray Kroc understood that giving away 25% of his company meant he could increase its size by 1000% so it was well worth it,... after all 75% of a million is better than 100% of 1/2 a million.

People who are worried that share purchase plans will "water down" their holding are really short sighted,...

 

[nioka]

1 of my holdings has an "annual" Share Purchase Plan
which i think is mega dodgy....i really respect company's that
value there shares by not issuing them Willy nilly.

Sometimes the issue of shares through an SPP is quite advantageous to current shareholders and are a way of a company paying a "pseudo" dividend. Recently TAS made an SPP where shareholders had the right to apply for shares on a one for every ten held basis and each new share was accompanied with a free option for an additional share. Shares were offered at a 30% discount on current price and the options were selling at 10.5c. This was quite a bonus to shareholders and raised funds for progressing the company. This was the second time this had happened since I have held shares in the company and has allowed me to increase my TAS holding at better than market rates. I'm happy for them to continue to do this.
I get annoyed with companies that issue shares to institutions at discounted rates to raise capital without offering shareholders the same deal. eg. the recent capital raising by AGM.

 

[Tysonboss1]

I get annoyed with companies that issue shares to institutions at discounted rates to raise capital without offering shareholders the same deal. eg. the recent capital raising by AGM.

Issueing lump sums of stock to institutions or large sophisticated investors is much less hassle for the company, because they can get the funds in one large amount with out the logistics and cost of mailing, printing and collecting and processing 1000's of payments,

remember even though the equity has been placed with the instutions you will still be benefiting from the accelrated growth the company will have because of the cash injection.

 

[nioka]

Issueing lump sums of stock to institutions or large sophisticated investors is much less hassle for the company, because they can get the funds in one large amount with out the logistics and cost of mailing, printing and collecting and processing 1000's of payments,

remember even though the equity has been placed with the instutions you will still be benefiting from the accelrated growth the company will have because of the cash injection.

I don't agree that it is cheaper that way. The issue is usually discounted more than it need be and is usually subject to commission charges. The loyal shareholders should be given an opportunity to make the investment.

 

[dyna]

Share purchase plans,before 2009,were restricted to $5,000 for non-pros.Since then, the limit has been raised to $15,000 max. Now,ASIC has raised SPP limits again, to a whopping $30,000.Maybe we are seeing the last of renounceable rights issues .

 

[So_Cynical]

Share purchase plans,before 2009,were restricted to $5,000 for non-pros.Since then, the limit has been raised to $15,000 max. Now,ASIC has raised SPP limits again, to a whopping $30,000.Maybe we are seeing the last of renounceable rights issues .

30K is a big jump...