Terry McCrann: IOOF’s funding scheme to buy MLC rips off retail investors
IOOF’s funding of its acquisition of MLC is a rip-off of retail shareholders sanctioned by ASIC and ASX, writes Terry McCrann.
Terry McCrann
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The appalling ripping off of retail shareholders — not just condoned but actually, incredibly, directly orchestrated by the two fake regulators supposed to protect them, ASIC and ASX — has reached something of a shameful peak with IOOF’s funding of its acquisition of MLC.
At the start of the year the fake regulatory duo signed off on listed companies dramatically increasing the amount of money they could raise via direct placements of shares at heavily discounted prices to selected institutional investors.
The previous limit for placements of 15 per cent of pre-placement capital was bad enough.
This already built in the ability of a listed company to transfer significant value — and real dollars — from its retail shareholders (and indeed existing insto shareholders either unable or uninvited to take part in the discounted placement) to the participating instos.
ASIC and ASX lifted the limit to 25 per cent. And then they supercharged it by allowing companies to calculate the 25 per cent not just on pre-placement capital but indeed as that percentage of capital after any accompanying entitlement issue.
Take the example of a company proposing a one-for-one entitlement issue. It could then have an accompanying placement equal to not just the previous 15 per cent but now 50 per cent of the pre-issue capital.
This opened the door to dramatically dilute the equity of retail holders who are not invited to discounted placements and are functionally disadvantaged by the non-renounceable nature of most entitlement issues (itself, another disgraceful blot on our wild west — or, more accurately, south — capital market).
Now, “dilute” is a rather sterile word; the truth of the matter is that these processes take real dollars from retail holders and transfer them to the instos and the investment banks which pocket huge multimillion-dollar fees for handing out what is quite literally free money to those instos.
Yes, free money, without any qualifying quotation marks. Take the IOOF example. The company and its underwriting IB Citigroup are placing shares costing $452 million with those selected instos. They are worth — on the company and Citigroup’s own assessment (and mine, and anyone that can do basic arithmetic) — $523m.
That’s worth $523m, not in a month or six months or on the assumption that the MLC buy will work wonders for IOOF.
No, they are worth $523m at the very point of the placement. IOOF and Citigroup are handing the selected instos $71m simultaneously with handing them the shares they are subscribing for.
That $71m hasn’t been conjured up out of thin air; it has come directly from the retail holders and the instos not invited to the free money handout.
Now, at the start of the year, the loosening of the rules was justified — and had some validity — by the fear and loathing, and real damage done to companies by the market panic over the virus that sent share prices plunging, and then the lockdowns sending the entire global economy into deep recession.
Companies had to be able to raise fresh capital and raise it fast. They could literally have collapsed. That would not have served the interests of any of their shareholders.
Now, if we had had a properly functioning capital market and regulators which actually understood how markets should work, and had not long established as a working principle that retail holders could be routinely ripped off, we would not have had to embrace the venal stupidity of what ASIC and ASX endorsed.
But that aside, given that the whole market process was structurally built on ripping off retail, and given the extraordinary existential circumstances that prevailed in March, you might — might — have been able to accept this to save otherwise functionally healthy companies from destruction and so their shareholders losing 100 per cent of their money.
But that was March and this is September. IOOF was not at death’s door. IOOF is not doing its retail rip-off to save itself from destruction, but indeed the exact opposite.
Further and critically, it is doing it in a market that has largely recovered from the March disaster.
In short, there is no capital emergency; there is no market panic; there’s only the settlement of a long carefully negotiated deal, which could have, should have, included a carefully thought through capital raising exercise.,
IOOF could have, should have, raised its money with a one-for-one renounceable share issue to all its existing shareholders at $3.20 per share.
No placement, no functionally discriminatory non-renounceable issue. But instead a totally fair, totally sensible renounceable issue — and as it would have been at an even bigger discount (costing no one) to the pre-issue adjusted $4.51 market price, would have been rushed.
But then the selected instos wouldn’t be getting a free $71m and Citigroup wouldn’t be getting a multimillion-dollar fee for handing them the free money. You certainly have to admire the way this has brought together utter stupidity with disgraceful market and regulatory practice.
BURYING BANCASSURACE
What just happened?
NAB’s sale of MLC has brought to a final end the three-decade big bank flirtation with a downunder “bancassurance model”.
Our big banks came out of their own near-death experiences in the 1991 “recession we had to have” embracing the idea of moving into all the non-bank financial activities like life and general insurance, and most particularly the new growth area of funds management and investment advice.
The treasurer who had “helped” take them to death’s door with his recession had also opened another door to a glorious growth future with compulsory superannuation.
Now, 30 years later and after a royal commission, it’s all come to nought.
Originally published as Terry McCrann: IOOF’s funding scheme to buy MLC rips off retail investors