On Airasia's private placement to the founders

I have written a lot about private placements. Some I am positive, most of them, I am negative. I have written about Airasia's private placement (PP) the day after the announcement of the PP to the founders on 2 April 2016. If you read many of my articles on Airasia, I actually prefer for a rights issue - and I meant it (why not), but if one is to study the exercise during then - 1 April 2016 (please look at the below chart) - they can't do rights issue at that point of time. The share price was climbing from a low of RM0.78 where many would have thought Airasia was a candidate for bankruptcy due to its debt. There was not going to be any bankruptcy as their debts are really long term with strong positive cashflow to support - period.

It will be deemed as Airasia was desperate for funds (from its public shareholders) and that would have been detrimental towards the company. Then, if the founders decided to put in and committed their own money, nobody can complain. If one can remember, the closing price for Airasia on 1 April 2016 was RM1.84 - and that was what the price for PP. There was no discount, unlike many of the PP that are announced i.e. up to 10% discount.

Again, I do not like the PP as I knew the founders gotten them for a good price and based on that article I wrote, if one know how to read the action well, investors could have purchased Airasia then at RM1.84. One would have gotten the shares similar to the PP price.

Again, on PP - one of my holdings - Ecoworld, actually is currently doing a huge PP of 30% (yet to complete as there are many rounds). Theirs to me is very fair. Why? The founders cum controlling shareholders commit themselves first at RM1.30. At one point of time, their shares were traded at RM1.22 and the founders still put in cash for more shares at RM1.30. That makes the entire exercise looks fair.

The one PP that is really bad is WCT's and I still keep my opinion to it.

I hope this explains.

WCT: Hate private placements

I am not a shareholder of WCT. I took notice of a good construction company where it changed hands and seriously I thought it has moved to a more dangerous hand but one who probably can move the group further if the controlling shareholder does the RIGHT thing.

This new announcement, is all about the controlling shareholder does the WRONG thing. He does not care less about the smaller shareholders - EPF, PNB etc. included. WCT just yesterday announced that it is going to do a 10% fund raising through private placement. That itself smells rotten intentions.

Why?

First of all, the new shareholder (Tan Sri Desmond) bought the controlling share from the original founders at RM2.50. That is fine as although I do not really think that WCT is worth that much, to get control, you must pay premium. I also take note of the shareholder's need to improve its balance sheet. Hence, it has several options - rights, private placements, sale of assets as the most probably ones. It choses private placements and this is the worst one probably.

This is an option which may provide value to controlling shareholder but would be bad for smaller shareholders. It feels that the controlling shareholder is trying to get his portion (through proxies) at a cheap. This is because for private placements, it can issue its shares at 10% discount from market price (5 days average).

Now, the question is very clear. If Tan Sri Desmond bought his shares at RM2.50, would he allow additional shares to be issued at say RM1.60 (10% discount from RM1.77 current price at this point of writing)? And this is to external parties. If he is not protecting himself, he is not so clever isn't he? This means he is diluting his own purchase value.

I do not think he is that stupid to do this. And from the look of the market reaction, they probably know what he can do. Proxies! (I say can because I definitely do not know this is what he does, hence the name proxies)

This is the reason why private placement is WRONG. First of all, it should not be at up to 10% discount from market price. Second of all, it should have the first option to all current shareholders. Not new shareholders.

Private placement has been around as long as I followed the Bursa market since 1990s and this is seldom done in a good way to protect shareholders. Not always bad, but seldom is good.

It is quite archaic in terms of structure.