Olam International

(29-12-2012, 02:07 AM)specuvestor Wrote: I think there are a few misconceptions here:
1) equity repaying bond is NOT shareholder paying shareholder. It is not right pocket to left pocket. More like the left pocket has a hole ie dilution
2) The real cost of the warrant is not present price or future price of the warrant. It is the strike price. Is this strike price close to the intrinsic value of the company for shareholders to be diluted?
3) the real cost to the company is different from 1) the cost to shareholders and different from 2) the PRICE based on black scholes. Obviously this is not the teaching of standard finance 101. From Buffet's point of view when he did the 10 years S&P puts, the price of the option is actuarial, the cost of the option is fundamental. I would say the real cost to a company issuing options or warrants is ZERO, assuming the shareholders are daft.

Some comments
1) I'm talking from the company's point of view. For them it's really shareholders paying shareholders if they decided to have shares placement to replace this bond issue. My point was that their cost of borrowing can be even lower than the 8% that the public perceived. Of course, if we are looking as a shareholder, we will get dilution.

2) Will shareholders really get diluted if they subscribed to the rights? For those that did, they won't get dilution, but those that didn't due to whatever reason will..

3) Yea, my initial point is that Olam as a company didn't lose out that much in this deal. Like you say, zero cost for them for the warrants. The major downside is that they lose on minority shareholders' confidence, since the deal is structured to the advantage of Temasek and the other major shareholders that decide to that up the rights issues.

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(28-12-2012, 11:00 PM)freedom Wrote: if in the future when the warrant can be exercised, Olam is worth significantly more, it will be bad for Olam's financial performance because they sold their warrants today cheap. The dilution to earning is larger.

This is a good point. You are referring to EPS being calculated on an enlarged shares pool right? Thus making EPS growth (if there's a growth) looks lesser than it is and affecting overall shares price as a result?

One of the key point of discussion is warrant issued is zero cost (i assume banker's and listing fees excluded) to company? I am not so sure on that.

Definition of "company" should be shareholders, includes both major and minor shareholders

The bond will cost the company 8% in bond interest, and 5% more on warrants with a depressed strike price (decoded from Michael Dee's article). This is even for those shareholder exercise their warrants, and without dilution on their holding.

Placement is unfair to minority shareholders, but it is a right issues where all shareholders have their fair share of right and choice.

(31-12-2012, 09:40 AM)CityFarmer Wrote: Definition of "company" should be shareholders, includes both major and minor shareholders

"Should" and "is" are 2 different things. A company is a legal entity separate from its shareholders. If the company undertakes a massive placement at a low price, it's good for the company (extra money) but bad for the shareholders (dilutive). Likewise when a company buys back its own shares at a cheap price, it's bad for the company (spends money) but good for the shareholders (value accretive).

(31-12-2012, 10:02 AM)d.o.g. Wrote:

(31-12-2012, 09:40 AM)CityFarmer Wrote: Definition of "company" should be shareholders, includes both major and minor shareholders

"Should" and "is" are 2 different things. A company is a legal entity separate from its shareholders. If the company undertakes a massive placement at a low price, it's good for the company (extra money) but bad for the shareholders (dilutive). Likewise when a company buys back its own shares at a cheap price, it's bad for the company (spends money) but good for the shareholders (value accretive).

Are we equating 'company' to 'management' here?

(31-12-2012, 10:02 AM)d.o.g. Wrote:

(31-12-2012, 09:40 AM)CityFarmer Wrote: Definition of "company" should be shareholders, includes both major and minor shareholders

"Should" and "is" are 2 different things. A company is a legal entity separate from its shareholders. If the company undertakes a massive placement at a low price, it's good for the company (extra money) but bad for the shareholders (dilutive). Likewise when a company buys back its own shares at a cheap price, it's bad for the company (spends money) but good for the shareholders (value accretive).

Well, i agree company and shareholder are legally different entities, but they are synonyms. Without further playing with words, my point is "the company" should not mean "the management".

(28-12-2012, 04:31 PM)CityFarmer Wrote:

(28-12-2012, 01:55 PM)specuvestor Wrote: Isn't temasek limited by their shareholding cannot exceed 30% including the warrants?

Temasek will not underwrite 100% of right issue since at least other major shareholder already commit to subscribe, so should not be an issue.

Any investor holds 30% or more of the common equity shares, is required to make a general offer to buy up the rest not owned hence Temasek is not keen on equity. No restriction on bonds.

(31-12-2012, 10:54 AM)CityFarmer Wrote:

(31-12-2012, 10:02 AM)d.o.g. Wrote:

(31-12-2012, 09:40 AM)CityFarmer Wrote: Definition of "company" should be shareholders, includes both major and minor shareholders

"Should" and "is" are 2 different things. A company is a legal entity separate from its shareholders. If the company undertakes a massive placement at a low price, it's good for the company (extra money) but bad for the shareholders (dilutive). Likewise when a company buys back its own shares at a cheap price, it's bad for the company (spends money) but good for the shareholders (value accretive).

Well, i agree company and shareholder are legally different entities, but they are synonyms. Without further playing with words, my point is "the company" should not mean "the management".

Wasn't expecting a debate on the entity aspect of a company when I brought up the point on the cost of the right issue to Olam. It was more to give credit to the company (or management) as this right issue isn't as lousy or hastily decided as what critics such as Michael Dee suggested.

Moving on, for the company in the next few years, the actual financial cost is 6.75% only, and during the bond maturity, the company can have the option to do a rights or shares placement to repay these bonds if they and the shareholders want to.

Ultimately, if we look at the bigger picture, yes there will be dilution here and there for minority shareholders.. but if Olam follows Michael Dee's suggestion and raise equity now, the effect might be worse for minority shareholders.

(31-12-2012, 12:15 PM)zxiank Wrote: Wasn't expecting a debate on the entity aspect of a company when I brought up the point on the cost of the right issue to Olam. It was more to give credit to the company (or management) as this right issue isn't as lousy or hastily decided as what critics such as Michael Dee suggested.

Moving on, for the company in the next few years, the actual financial cost is 6.75% only, and during the bond maturity, the company can have the option to do a rights or shares placement to repay these bonds if they and the shareholders want to.

Ultimately, if we look at the bigger picture, yes there will be dilution here and there for minority shareholders.. but if Olam follows Michael Dee's suggestion and raise equity now, the effect might be worse for minority shareholders.

Without a definition of "the company", we may discuss on different issue

Let's define "the company" means the shareholders

First of all, it is 8% instead of 6.75%. The bonds is priced at 95 per cent of the principal amount.

Right issue is difference from placement. If shareholders (includes the minority) opt for full rights, there will not be dilution.

(31-12-2012, 12:31 PM)CityFarmer Wrote:

(31-12-2012, 12:15 PM)zxiank Wrote: Wasn't expecting a debate on the entity aspect of a company when I brought up the point on the cost of the right issue to Olam. It was more to give credit to the company (or management) as this right issue isn't as lousy or hastily decided as what critics such as Michael Dee suggested.

Moving on, for the company in the next few years, the actual financial cost is 6.75% only, and during the bond maturity, the company can have the option to do a rights or shares placement to repay these bonds if they and the shareholders want to.

Ultimately, if we look at the bigger picture, yes there will be dilution here and there for minority shareholders.. but if Olam follows Michael Dee's suggestion and raise equity now, the effect might be worse for minority shareholders.

Without a definition of "the company", we may discuss on different issue

Let's define "the company" means the shareholders

First of all, it is 8% instead of 6.75%. The bonds is priced at 95 per cent of the principal amount.

Right issue is difference from placement. If shareholders (includes the minority) opt for full rights, there will not be dilution.

Haha yar, that's why it's confusing. I'm referring purely to company here. ie: Olam, the management, the employees.. not the shareholders here as I want to look at it from a financial impact point of view for Olam.

Yes, I know the bonds are priced at 95%, but that is a discount given to the shareholders, and which the company will feel the 5% discount only during maturity when they need to repay back the money. From an ongoing financial aspect, Olam just need to pay 6.75% every year for the next 5 years. They do not need to bear 8% interest every year (although the projected yield for shareholders is 8% based on the discount which they will get back when the bond matures)..

The problem is d.o.g is right: Company and shareholders are different. Their interests are different. It is not hard to find stocks where the major shareholders benefit from other means at the expense of the company.

And majority and minority shareholders are also different. The former wants control of the company and its cashflow while the latter wants primarily income and dividends. If a stock does a right issue and all the shareholders subscribe, does it mean it benefits all? The company gets the cash and the major shareholder CONTROLS the cash. They could easily buy a plot of land in China with the major shareholder owning the construction company, for eg.

Hence dilution itself is not that easily defined, though easily defined by textbooks. The best safeguard for minorities is still having a dilution that is at or higher than the stock's intrinsic value.