Friday, December 10, 2010

LAUGFS GAS IPO – Lessons to be learnt for the future

It was unfortunate that the Stock Market conditions were such that even with a share which was touted as being over 20times oversubscribed, the Voting shares barely ended the first day with 15% premium and non Voting with about 10%. If this happened three months ago these figures would have been about 3 times as much. There are a few salutary lessons that have emerged. Namely, it was known that Shell decided to dispose of their shares and exit this business in Sri Lanka, with the minority holder, the government having the first right of refusal. This created an added sense of uncertainty to the investors. Even though Litro is a fully government undertaking there is uncertainty as to what will be done with it, though the LAUGFS Board was not worried. This overhang was not good timing.

The other point is that there were so many shares issued that it was inevitable that the desire of the small shareholder is to sell on the first day, especially as the number of shares given to them was also very small due to the oversubscription. I have 500 non voting shares which if I sold today would have given me a profit of Rs750 hardly worth my while in taking the risk of uncertainty into account. A large investor should have been lined up, as was the case with the last Hydro Power Free Lanka IPO, to support the price. In the latter case he supported a 50% premium which has stuck, but granted he bought one third of the new shares.

At the various briefings on the IPO the confident Chairman was confident in his attitude. I asked him why the Prospectus did not state (as is done in all other countries) that the existing shareholders will agree not to sell their shares for a time period of say 3 years. His answer was that they were reluctant to issue even this amount of new shares, why would he or his partner want to sell, and gave oral assurance to that fact. Well that assurance is not in writing and does not hold legal standing. It is the fault of the CSE new listing rules that do not require this clause.

The ‘Roadshows’ were well attended and a lot of money spent on schmoozing and advertising, but the shares are now at real risk of going below the issue price. That kind of ignominy is something that the Board will not countenance and will probably support at the issue price by purchasing, especially as the employees, dealers and customers of LAUGFS who were given preference would stand to lose.

It therefore goes to show that despite profit forecasts being achieved, substantial over-subscription resulting in a record of Rs50B of interest, the issue could be considered a flop in the eyes of the public. The company has achieved its immediate goal of raising the required funds, but future confidence is questionable.


Anonymous said...

There is a point that is important that you have not mentioned, namely that the Public Company is funding group companies to the tune of at least Rs400M interest free.

So the money raised from the issue could also be utilized this way despite the prospectus stating otherwise, to the detriment of the new shareholders.

That smacks of bad governance, reiterating the importance of transparency, when public issues are involved.

Foodie said...

Aren't shares that jump significantly in the first day of trading are usually those which were underpriced at offering?

When Netscape etc doubled, tripled on the first day of trading, it meant that Netscape's pricers left a significant amount of money on the table that the aftermarket traders picked up.

We could argue that the price not jumping significantly is a good thing because it meant the offering was priced as closer to fair market value as possible and raised as much money as possible for the company.

Only the traders lose out. But from the company's perspective, this is the best outcome.