The TCL Rights Issue, concrete boots and all…

27 March 2015


The TCL Rights Issue – In a Nutshell

TCL is offering all eligible shareholders the right to acquire up to 124,882,568 new shares at an issue price of $2.90 per share.
To be eligible shareholders must be resident in Trinidad and Tobago, and so long as they satisfy that requirement they can apply for one fully paid share for every two fully paid share they hold.
Under the rights issue TCL expects to raise $362,159,447 to be used in a manner as discussed below.
The closing date for accepting the offer is 4:00pm on the 31st march 2015.

Concrete Boots?

The rights granted to eligible shareholders are non-renounceable. This means that if an eligible shareholder chooses not to exercise those right they have no additional value and cannot be sold to other eligible shareholders who may wish to exercise the rights.
Under the terms of the rights issue an eligible shareholder has three options:
  1. Take up all of the entitlement to new shares or;
  2. Take up part of the entitlement and allow the balance to lapse or;
  3. Not take up any of the entitlement and allow all of the rights to lapse
The essential essence of the rights issue is that if a shareholder chooses not to exercise any of his options he derives no benefit from the issue and his existing shareholding is diluted.

How TCL plans to utilise the funds received from eligible shareholders

The funds raised from eligible shareholders under the rights issue will be used by TCL to:

  1. Pay restructuring and transaction expenses amounting to $7,793,671
  2. Replenish the working capital of the TCL Group to the tune of $150,000,000
  3. Service existing debt totalling $65,565,776
  4. Funding of additional investments in capital equipment to the sum of $140,800,000

What is the new board of TCL trying to achieve – in for the long term?

The key objective of the new board is to ensure that TCL has the appropriate capital structure and the ability to finance the company’s necessary capital expenditure and optimisation projects as the company seeks to return to generating positive value for all shareholders over the long term.

How did the Board arrive at the price?

In consultation with external financial advisors the Board took the following factors into account when setting the right issue price at $2.90 per share.

  1. The prospects for the industry in which the group operates
  2. The overall economic prospects of the main markets in which the TCL operates. Primarily these markets are Trinidad and Tobago, Jamaica, Barbados, and Guyana
  3. An assessment of the effectiveness of TCL’s management teams
  4. The level of support available from the significant shareholder CEMEX (through an investment by Sierra Trading)
  5. The strength of a re-capitalised TCL Group
  6. The recent market price for TCL shares
  7. The general conditions of the securities markets on which TCL shares are traded at the time of the offer

The Special Position of Sierra Trading (CEMEX)

On the 9th February 2015 the shareholders of TCL voted to remove a restrictive covenant limiting the ability of any one shareholder (or group of connected shareholders acting in concert) from holding more than 20% of the ordinary shares of the company.
On the same date that this resolution was passed the TCL board of directors signed a subscription agreement with Sierra Trading a current 20% ordinary shareholder of the TCL group.
The key terms of the subscription agreement are as follows:
  1. Sierra Trading will commit to taking up all the rights it is entitled to subscribe for under the terms of the rights issue. Moreover the subscription agreement grants to Sierra Trading the right to purchase any rights that are not taken up by other shareholders up to a maximum amount that would bring Sierra Trading’s shareholding in the TCL group to 40%
  2. If on the completion of the rights issue Sierra Trading’s shareholding is less than 35% of the total ordinary shares of the TCL group, TCL will –subject to the approval of its ordinary shareholders – allocate additional shares to Sierra Trading as a “private placement” (not through any of the stock exchanges which currently trade TCL group shares) in an amount that will allow Sierra Trading to achieve a shareholding of 35% of the ordinary shares
  3. As consideration for the agreement Sierra Trading have agreed to commit US$45m in additional capital to ensure that TCL meets its capitalisation target of at least $50m

The Firstline View on the TCL Rights Issue

The positives –

On the positive side the rights issue raise much needed capital for the TCL group allowing it to fully settle outstanding negotiations, and fund working capital requirements and capital expenditure moving forward.

The negatives –

The rights issue does not in any material manner change the debt structure of the TCL group. This is important as it means that the providers of existing debt to the TCL group still retain significant sway over the day to day operations of the TCL group under the terms of the existing creditor override agreement.

Overpriced? –

Firstline’s own external analysis – based on a number of conservative assumptions – estimate that the fair market price of the TCL group’s ordinary shares prior to the rights issue to be in the region of TT$2.40 per share. This is the price “cum-rights” meaning that the price should decrease after the rights issue due to dilution.
A savvy investor interested in increasing their stake might therefore consider increasing their stake through a normal share acquisition after the rights issue has been consummated.
If you are interested in financial advice in respect of investing in shares, or are interested in future IPO’s, or wish to discuss other investment opportunities with a member of our team please contactinfo@nullfirstlinesecurities.com or call for Mrs. Ihsan Slater at 868.628.1175. We look forward to hearing from you.

 

Comments are closed.